In recent developments, the Indian equity markets are experiencing a significant outflow of funds from foreign portfolio investors (FPIs). This month alone, FPIs have withdrawn approximately Rs 64,156 crore ($7.44 billion), marking a substantial shift in investor sentiment. The withdrawal is driven by several factors, including the depreciation of the Indian rupee, rising US bond yields, and concerns over an underwhelming corporate earnings season. Despite investments made in December, totaling Rs 15,446 crore, the current trend reflects a combination of global economic pressures and domestic challenges that have influenced this decision.
The ongoing depreciation of the Indian currency has been a critical factor in this exodus. According to Himanshu Srivastava, Associate Director at Morningstar Investment Advisers India, the weakening rupee is placing considerable strain on foreign investors, compelling them to withdraw their capital from the Indian market. Additionally, the high valuations of Indian equities, despite recent corrections, along with anticipated subdued corporate earnings, have further contributed to investor caution. The unpredictable nature of global policies, particularly those emanating from the United States, has also played a role in making investors wary of riskier investment options.
V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlighted that the sustained strength of the US dollar and the rise in US bond yields are primary drivers behind the selling activity. He noted that as long as the dollar index remains above 108 and the 10-year US bond yield stays above 4.5%, the trend of FPIs selling off shares is likely to persist. This scenario underscores the interplay between global financial conditions and local market dynamics.
FPIs have been net sellers in the Indian equity market almost every day this month, with only January 2 being an exception. The consistent selling pressure indicates a broader realignment of investment strategies among foreign investors, who are responding to changing macroeconomic landscapes both within India and internationally. As these factors continue to influence market behavior, the Indian equity market may face further volatility in the coming weeks.
The current outflow of foreign capital from the Indian equity market highlights the complex interplay of global and domestic economic forces. Investors are carefully reassessing their positions in light of shifting currency values, interest rate trends, and corporate performance expectations. While the immediate outlook appears cautious, the long-term trajectory of the Indian market will depend on how these factors evolve and whether they stabilize in the near future.
The South Korean currency, the won, has seen a significant drop in value during December 2024. This decline was triggered by a period of political unrest that followed the brief implementation of martial law. According to recent data from the Bank for International Settlements (BIS), the real effective exchange rate (REER) of the won fell to 91.3 at the end of December, marking a decrease of nearly two points from the previous month. The REER measures a currency's strength relative to a basket of other currencies, adjusted for inflation. A figure below 100 indicates depreciation compared to the base year, while above this benchmark suggests appreciation.
This dramatic shift placed South Korea second on the list of 64 BIS-monitored countries, just ahead of Japan, whose REER stood at 71.3. The monthly decline of almost two points was one of the fastest globally, behind only Brazil and Australia. The won's depreciation was the most severe since September 2022, when it experienced a sharp fall due to the Legoland debt crisis, leading to heightened concerns about corporate bond yields and credit availability. Exchange rates reflected this instability, with the won weakening significantly against the U.S. dollar throughout December, starting from approximately 1,370 won per dollar in November and reaching 1,486.7 won by late December.
The turbulence in the foreign exchange market was heavily influenced by political changes brought about by the imposition of martial law. Governor Rhee Chang-yong of the Bank of Korea addressed these issues in a January press conference, noting that the won-dollar exchange rate had risen beyond what economic fundamentals would suggest. He highlighted the impact of the widening interest rate gap with the United States. Despite these challenges, the situation underscores the resilience and adaptability required in global financial markets, emphasizing the importance of stable governance and sound economic policies to maintain currency stability and investor confidence.