Explained | Why are REITs selling Indian stocks?

What led to the sale by foreign portfolio investors? Does this affect the ongoing economic recovery?

What led to the sale by foreign portfolio investors? Does this affect the ongoing economic recovery?

The story so far: Foreign portfolio investors (REITs) have gone on a selling spree in India. May’s figures of around ₹44,000 crore formed the highest monthly sales quantum since March 2020, when India announced a nationwide lockdown. Last month was also the eighth trotting REITs to sell net of assets – that is, they sold more than they bought. Their selling actions triggered a significant decline in benchmarks leading to a drop in the companies’ market capitalization.

What are REITs?

Foreign portfolio investors are those who invest funds in markets outside their national territory. Their investments typically include stocks, bonds, and mutual funds. They are generally not active shareholders and exercise no control over the companies whose shares they own. The passive nature of their investment also allows them to enter or exit a stock at will and easily.

What factors drive FPI moves?

The promise of attractive returns through economic growth attracts investors, including REITs, to a country’s markets. For example, according to data from National Securities Depositories Ltd. (NDSL), REITs earned around ₹3,682 crore in 2002. This rose to 1.79 lakh crore in 2010. This correlates with the concurrent expansion of economic output during this period. , despite the 2008 global financial crisis which led to REIT sales during this period in the country. The year 2017 saw inflows of REITs exceed ₹2 lakh crore.

Similarly, REITs withdrew ₹1.18 lakh crore in March 2020 alone – the month India announced a nationwide lockdown, sparking concerns over economic growth. At the same time, the benchmark Sensex stock index fell from 42,270 in February 2020 to 25,630 in March 2020.

REITs also show a willingness to invest in bonds when there is a favorable differential between the real interest rates offered in the country in which they wish to invest and other markets, but more precisely, compared to the most world’s largest economy, the United States.

Why have REITs sold Indian holdings?

REITs sold assets worth ₹44,000 crore in May 2022. This was the second highest sale in a month since 1993, after March 2020.

After the pandemic, the recovery of the Indian economy has been uneven. The second wave of the COVID-19 pandemic in 2021 devastated lives and livelihoods. The economy stuttered again when a third wave, although less severe, saw the spread of the Omicron variant earlier this year. Add to that the return of pent-up demand to economies around the world as the pandemic subsides. The pace of the recovery caught suppliers off guard, contributing to supply-side shortages.

Even as the industry grappled with this challenge, Russia launched an attack on Ukraine. Sunflower oil and wheat supplies from both countries have been hit, driving up world prices for these crops. As supply in general tightened around the world, commodity prices also rose and headline inflation accelerated. India has seen an acceleration in price inflation which has remained above the Reserve Bank’s upper comfort level of 6% for four consecutive months, reaching 7.8% in April. Industrial production has also had a bumpy ride without giving confidence in a full and definitive recovery from the pandemic. Consumer spending also remained weak in the subcontinent.

With each of these factors contributing to declining confidence in robust economic performance, foreign portfolio investors have reduced their investments in the markets in recent months.

Add to that the US Federal Reserve raising the benchmark interest rate from March this year. The key rate went from 0-0.25% in March to 0.75-1% in May and is expected to increase by 50 basis points at each of the next two Fed meetings.

When the interest rate differential between the United States and other markets narrows, and if such an event is accompanied by a strengthening dollar, investors’ ability to earn healthy returns is affected. Indeed, returns are measured not only by the appreciation of asset values ​​but also by changes in exchange rates. If the dollar strengthens against the rupee, then an investor is able to realize fewer dollars for a given amount of liquidated rupee assets. Moreover, if inflation accelerates in the foreign market where the investor has placed funds, real returns are further affected.

They then tend to exit assets considered “risky” as in emerging markets such as India, Brazil or South Africa.

What is the impact of a REIT sale?

When REITs sell their holdings and repatriate funds to their home markets, the local currency takes a hit. After all, they are selling rupees in exchange for their home market currency. As the supply of the rupee in the market increases, its value decreases. In this case, the rupee has recently seen all-time lows. About a year ago, it was trading in the region of 73 per US dollar; it now flirts with level 78. With a weaker rupee, we have to spend more funds to import the same unit of goods. The most telling impact is on the cost of our crude oil imports which contribute 85% of our oil needs.

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