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Quote on Market  08 August 2022 By Kunal Valia, Chief Investments Officer – Listed Investments, Waterfield Advisors

"India’s foreign exchange reserves have come down from USD 630bn in Sep 2021 to around USD 580bn in July 2022. This is on the back of continuous selling in Indian equity markets by FII.

FII Sell-off is not just restricted to India but widespread across emerging markets as well as quite a few developed markets. The Sell-Off has been triggered due to aggressive rate hike by the US federal reserve on the back of unseen roaring inflation in decades.

We have a classical standard playbook on display, where higher interest rates in US leads to flows moving to US, resulting in strengthening US Dollar at the cost of emerging economies. While Indian equities and bonds have been resilient relative to most markets, the domestic economy is facing a twin challenge of high fiscal deficit and sharply rising current account deficit. While the fiscal deficit is funded largely domestically, CAD is a function of import-exports and flows. We are more focused on CAD numbers till FY 23 as we are witnessing a surge and as per trends, it is likely to shoot above 3% of GDP. This is a worrisome macro for FIIs.

July 22 saw a sharp decline in FII selling and closed with mild positive flow and there is turnaround in Aug with positive inflow of 8600 Cr till Aug 4. This shift is based on few assumptions which are yet to fortify – We are past the peak inflation in US and Fed is likely to turn dovish post 2022 i.e. Fed Pivot.

We are not yet confident that inflation is likely to drop to the Fed's Comfort level this year and whether recessionary trends are broad based in the US Economy. So the current turnaround in stance of FII with regards to India is yet to be confirmed. However, we believe a large part of FII Selling in India is past us and we will monitor the growth-inflation dynamics for a quarter to be certain"

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