Foreign investors have pulled out a whopping Rs 71,652 crore from Indian markets since November 2016 as demonetisation, the slowdown in the economy and the US policy changes prompted them to change their investment strategy.

After taking out Rs 66,507 crore in November and December, foreign investors have withdrawn Rs 5,145 crore from the capital market so far in January 2017. Apart from concerns regarding “lower prospects” of economic growth as compared to other emerging markets, the change of guard in the US and the rising interest rates in the world’s largest economy also played a role in the FPI withdrawal, analysts said.

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The January FPI outflow followed withdrawal of close to Rs 77,000 crore on net basis from equity and debts together in last three months (October-December). Prior to that, FPIs had invested over Rs 20,000 crore in the capital markets. In November, when demonetisation of high value notes started, FPIs sold debt and equity worth Rs 39,396 crore. In December, FPIs withdrew another Rs 27,111 crore, data compiled by the National Securities Depository (NSDL) said.

According to an analyst, FPI outflows may be attributed to relative lower prospects of growth in the Indian economy as compared to other emerging markets as well as developed countries. Top rating agencies and investment banks have downgraded India’s GDP growth for 2017 by 0.50 per cent to one per cent.

The first advance estimates released by the Central Statistics Office (CSO) showed India’s GDP growth is seen decelerating to 7.1 per cent in 2016-17 (April-March) from 7.6 per cent last year, primarily due to slowdown in manufacturing, mining and construction sectors. Crisil had estimated India’s GDP to grow at a lower rate of 6.9 per cent in fiscal 2017. “In the wake of demonetisation, even if the situation limps back to business as usual by the end of fourth quarter, not all impacted sectors may rebound equally,” Crisil said. Sectors hitherto dealing in high value cash transactions such as real estate (and thereby related sectors such as cement and other building products), and

luxury automobiles, may take longer to revive compared with others, it said.

According to Bank of America Merrill Lynch, incoming data show that demonetisation is hurting growth. “While November industrial growth jumped to 5.6 per cent on base effects, our lead indicator is pointing lower. The CSO, in fact, has cut its FY17 growth forecast to 7.1 per cent even without demonetisation. Our Old series GDP growth is running at 4-4.5 per cent which is well below the 7 per cent potential,” it said. Foreign portfolio inflows into Indian debt bore the brunt of interest rate hike by the US Federal Reserve in December and uptick in oil prices post OPEC’s deal on production cut. “Also, the rally in the Indian government securities coupled with narrowing spread between the US interest rates and India (gilt rally in India) led to profit booking by foreign portfolio investors (FPIs). As a result, FPI had net outflows to the tune of $6.5 billion in 2016, vis-à-vis inflows of $7.5 billion in 2015,” Franklin Templeton Investment said in a report.

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