As the Indian stock markets battle the headwinds caused by coronavirus pandemic, foreign investors are making large scale withdrawals.
In March, foreign portfolio investors took away more than one trillion rupees (US$13.36 billion) from the markets as governments in various states and the central government resorted to lockdowns to contain the pandemic, the Press Trust of India reported.
The depositories data showed that between March 2 and 27, foreign portfolio investors withdrew a net amount of 593 billion rupees ($7.92 billion) from equities and 528 billion rupees ($7 billion) from the debt segment. This was the highest withdrawal since foreign investors’ data was made available on the National Securities Depository Ltd.
For the past six months, foreign investors were the net buyers in Indian markets.
On March 24, Prime Minister Narendra Modi announced a nationwide lockdown for 21 days as part of efforts to stem the outbreak of coronavirus infections. This dealt a body blow to the economy as businesses and trade came to a halt, and a further slowdown is expected.
The scene across the world is no different and this pandemic has triggered fears of a global recession. International Monetary Fund chief Kristalina Georgieva on Friday said the coronavirus pandemic has hit the global economy so hard that the world has entered a recession.
She called for massive funding to help developing nations turn around from the downturn resulting from the pandemic. Georgieva claimed this recession will be worse than in 2009 and the IMF estimates that the overall financial needs of emerging markets will be $2.5 trillion or even higher.
Market experts say foreign portfolio investors are now looking for safer investment options such as dollar-denominated asset classes and gold, as against investing in fixed income securities of emerging markets like India, which they consider to be vulnerable to economic shocks. They expect the situation to improve if the current surge in coronavirus cases in the country tapers off.
The Indian finance minister and the central bank have announced various measures to improve the flow of liquidity in the market. But experts say they will have to wait to see what impact it will have.
Even before the coronavirus began to impact China and later other economies in the world, the Indian economy was facing a demand slowdown with rural areas facing rising unemployment and falling incomes. These markets were heavily dependent on shadow bankers for credit. But the fall of major companies such as Infrastructure Leasing & Financial Services Limited and Dewan Housing Finance Corporation led to a credit crunch.
The announcement of a lockdown further aggravated the crisis. With the stoppage of trains, buses and even flights, economic activity across the country has been severely curtailed. Rating agencies have begun revisiting their earlier growth forecasts.
Moody’s Investors Service has nearly halved India’s economic growth projection for 2020 from its earlier 5.3% to 2.5%. The rating agency expects the current lockdown to dampen economic growth in most sectors. If the impact of Covid-19 is prolonged and deepens the global slowdown, it will adversely affect India.