This pre-election year, markets don’t mirror 2013 conditions  

It is ominous that foreign portfolio investors (FPIs) have pulled out $6.98 billion from the Indian capital markets in the first six months of 2018—the highest in 10 years. January-June 2018 saw FPIs dumping equity and debt worth $851.6 million and $6.12 billion, respectively.

In contrast, January-June 2017 saw total net inflow of $22.66 billion (comprising $8.12 billion of equity and $14.54 billion of debt)—the highest since 2009. Also, debt investments in the first half of 2017 were the highest for the period since 2009.  The second best six-month period was in 2014, when $10.42 billion was pumped into debt by FPIs.

Yes, 2014 was an election year. And since the next general elections are scheduled for 2019, the first half of 2018 should be compared with the first half of 2013 (H12013). Against a net outflow in equity and debt, H12013 saw net inflow in equity worth $13.5 billion, while FPI investments in debt saw a net outflow of nearly $1.2 billion.

In the 60 months analysed, FPIs’ investments in equity saw 20 months of net outflow worth $18.1 billion, while there was net inflow of $79.1 billion in the remaining 40 months. Coincidentally, debt investments by FPIs saw net outflows in 20 of the 60 months. While net outflows added up to $23.3 billion in the 20 months, net inflows in the 40 months added up to $57.8 billion.

While it would be unfair to compare FPIs with hedge funds, their investment actions, too, are propelled by factors such as interest rates and exchange rates. And, 10 years is a fairly long time to analyse how exchange rates have moved. While the first six months of 2009 saw the average exchange rate at Rs 49.28 a dollar, the rupee became stronger at Rs 45.78 a dollar and Rs 44.99 a dollar in the first halves of 2010 and 2011, respectively. In the subsequent years, the dollar has got stronger as the rupee weakened to Rs 52.19 (in H12012), Rs 60.79 (in H12014), and Rs 67.19 (in H12016).

In the 2,290 traded days—from January 1, 2009, to June 29, 2018—the rupee was strongest at Rs 43.9485 a dollar on July 27, 2011, and has weakened by 56.9% to Rs 68.9389 on June 28, 2018. It is a given that investing actions of FPIs give cues to the market, and that this time it is different from 2013.

(Sources for infograms: NSDL, CSDL, RBI, Fortune India Research)