The India exposure of FPIs is affected both by its speed in raising interest rates as well as its dependence on imported energy. The US Federal Reserve has increased its policy interest rate by 1.5 percentage points since the beginning of its monetary contraction earlier this year. In comparison, the Reserve Bank of India (RBI) has raised rates by 0.9 percentage points. India also imports 85% of its crude oil and 45% of its natural gas. The oil and gas import bill, netted for exports of refined petroleum, climbed to $113 billion in 2021-22, from $63.5 billion in 2020-21 and $92.7 billion in 2019-20. Brent crude averaged $71 a barrel in 2021; RBI’s latest projection for the Indian basket is $105 a barrel in 2022-23.
The net FPI outflow of $32 billion in the last nine months exceeds by a wide margin the cumulative net outflows over the decade to 2019-20. The Indian equity market has managed this degree of reversal mainly because of the rise of a new segment of retail investors that is channelling a bigger chunk of household savings into stocks. The number of demat accounts in the country grew 63% in 2021-22 to 89.7 million. Net inflows by retail investors in the National Stock Exchange (NSE) cash market segment have reduced the dominance of FPIs in trading turnover. Their holdings, too, are now matched by local mutual funds and insurance companies.
Surging domestic retail investments have stretched valuations of Indian stocks, and a correction due to FPI outflows would, at some point, draw in value investors. The flight of capital could slow as the Fed’s rate hiking trajectory eases, by which time the demand contraction in the US may make commodity producers less attractive to investors.