25 Jun Exit of foreign portfolio investment (FPIs)
The exit of Foreign Portfolio Investments (FPIs)
Foreign Portfolio Investments, which currently control about 19.5 percent of the market capitalization, had taken out Rs 42,000 crore in June.
What’s the issue?
The pressure on the Indian currency is likely to continue as a result of the growing inflation and tightening monetary policy in the US.
Why is money leaving the country?
Large-scale capital outflows from a country as a result of political or economic unrest have a detrimental impact on that nation’s economy. This phenomenon is known as capital flight.
Capital flight causes:
- The US Federal Bank tightening of monetary policy
- Other central banks, like those in Britain and the Eurozone, have raised interest rates.
- Apprehensions on the probability of a US recession
- Increased Inflation
What are the legal standings of foreign portfolio Investments in India?
- An investor who purchases foreign financial assets such as equities, mutual funds, and fixed deposits is said to be engaging in foreign portfolio investment (FPI).
- The largest non-promoter shareholders in the Indian market are foreign portfolio Investments and their investment choices have a significant impact on stock prices and the market’s trajectory as a whole.
- According to data from the National Securities Depository Ltd., the US accounts for a sizable portion of FPI investments as of May 2022, followed by Mauritius and Singapore (NSDL).
- The foreign portfolio Investments are run by the Securities and Exchange Board of India (SEBI).
- The Foreign Portfolio Investors Regulations, 2019, were just released by SEBI.
- Foreign Portfolio Investments must also abide by the Foreign Exchange Management Act of 1999 and the Income-tax Act of 1961.
How do Foreign Portfolio Investments function?
- The goal of investing in international markets is to diversify the portfolio and get a sizable return.
- Foreign portfolios raise volatility and risk at the same time.
- Foreign investors engage in a risk-off trade during periods of global unpredictability, increasing their holdings of bonds and gold while reducing their exposure to riskier assets like equities.
- When interest rates rise in the US and other developed nations, investors pull money out of emerging markets like India and put it into domestic bond markets instead.
How do the markets and the rupee fare as a result of capital flight?
- Capital market: The withdrawal has lowered investor confidence in the stock and FX markets.
- Increased market volatility and falling equity prices are two indicators of how FPI selling has affected markets.
- Forex- As of June 10, 2022, India’s foreign currency reserves have decreased by $596.45 billion, primarily as a result of the strengthening dollar and FPI withdrawals.
- Depreciation: Against the dollar, the rupee has fallen 7.3 percent to an all-time low of 78.30/32.
- Another drawback is that FPI outflows would persist if the rupee does not rise.
- Inflation: As import costs rise due to the weaker rupee against the dollar, inflation continues to rise.
- Indians studying or traveling abroad will need to pay extra rupees to banks in order to purchase dollars.
- People are immediately harmed by the rupee’s decline due to the sharp rise in fuel prices.
- Retail and domestic institutional investor (DII) inflows are both declining, and if the Foreign Portfolio Investments (FPIs) outflows continue, the markets may decline even more.
In this article, we mention all information about the Exit of foreign portfolio investments (FPIs) in Today’s Current Affairs.
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