India has witnessed $14.5 billion of total outflows in 2022 till date, of which $14 billion was equity outflows. Other EMs that have witnessed portfolio outflows include South Africa and Poland, but both countries were led by debt outflows.
South Korea has witnessed equity outflows worth $6.8bn but this was more than offset by debt inflows.
“Equity outflows generally tend to bounce back quickly, also pulling up the rupee, particularly going by the experience of the 2008 global financial crisis” noted the report.
“Equity market valuations in India remain above all developed markets and emerging markets. This may have led to important outflows from Indian equities when compared to other EMs. Indian output spreads with the US are comparable with Indonesia, and above most EMs, except Brazil, Mexico and Russia, suggesting that the debt market may be relatively fairly valued. However, the debt market is unlikely to attract flows in the near term given the headwinds ranging from elevated crude oil prices amid heightened geopolitical uncertainty, tightening by the US Federal Reserve and relatively low real rates in India,” said the brokerage.
Past episodes of liquidity tightening have seen higher debt outflows:
Past episodes of liquidity tightening by global central banks in FY14 (2013) and FY19 (2018) had led to higher outflows from the debt market vs. the equity market in India. In contrast, the current scenario has seen higher equity outflows akin to the 2008 global financial crisis. In fact, equity outflows by FPIs in FY22 at $18.4 billion have far surpassed equity outflows witnessed in FY09 (2008 GFC) at $10.3billion.