Aggressive selling by FPIs is a matter of concern even though India's economy is in the fundamental zone

- In case of massive selling by FPIs, the market does not tend to collapse

The statistics of the economic growth rate of the country which has been published recently provide an indication that the economy of the country is healthy. The barometer of any country's economy can be known from its stock market. That is, if the economy is prosperous, the share prices and share indices of various companies in the country are high. In the current financial year, the country's economic growth rate has been estimated to be more than seven percent in various reports and it is estimated that this pace will be maintained in the next year as well. While the country's high economic growth rate is encouraging amid the current global slowdown, the current state of the country's stock markets is quite volatile. The stock market has become a huge rollercoaster. One day increases, two days it falls. Why are our stock markets volatile despite claims that the country's economic growth rate is strong and industrial conditions are good? Such a question does not remain unanswered.

Ever since the doors of the country were thrown open to Foreign Institutional Investors (FPIs), their dominance in our stock markets has increased. The stock market direction depends on the FPI trades. Market indices fluctuate according to their movements. If we look at the FPI figures for the decade 2014 to 2023, in seven of these ten years, foreign investors have been net sellers in Indian equities cash and in three years they have been net buyers. Even in the current year 2024, FPI's have been net selling in cash till now. Domestic Institutional Investor (DII) activity has increased over the past few years, which is often seen as supporting the market. In a recent report, the asset under management figure of the country's mutual funds industry has crossed Rs 50 lakh crore, indicating that the country's institutional investors are in a strong position.

Foreign investors are cautiously investing in equity markets around the world due to concerns about the global economy. It is not often that the forex reserves of the country come under pressure due to selling by foreign institutional investors. It is different that the rupee stands against the dollar due to the intervention of the Reserve Bank at such times. 2023 saw a significant decline in forex reserves due to foreign investor selling and higher crude oil prices, and the rupee also came under pressure.

In the early 1990s, to overcome the balance of payments crisis faced by the country, the policymakers of that time opened the doors of India for foreign investors to generate foreign exchange in the country. Keeping in mind the fact that foreign aid will have to be relied upon to repay loans taken from abroad, India, like other countries, opened the doors to start the flow of money from foreign investors, as a result of which the country's foreign exchange reserves have reached more than 600 billion dollars in the last three decades.

It can be understood from the increased number of forex reserves that the strategy of bringing foreign money into the country through foreign investors has been successful, but as a result of the uncertain movement of foreign investors seen for some time now, the consequences of its adverse impact on the forex reserves of the country and the equity market can be severe, especially It won't be long before many calculations change due to the erosion of money from the country's retail investors.

Due to the possibility of an interest rate cut by the American Federal Reserve and a weak global economy, FPIs sold off globally in equities in 2023. As far as India is concerned, in case of this sell-off, the demand for dollars arises, which results in the dollar strengthening again against the rupee. Thus, selling of FPIs continues to have an adverse effect on the Indian stock market as well as on the currency market. Although India's economy is currently in the fundamental zone, aggressive selling by FPIs can be a matter of concern for the country.

Talking about the equities market, there is a danger of erosion of the wealth of small investors due to the volatility that FPI has created in the global equity markets including India. The wealth of retail investors should not be eroded to such an extent that they stop investing directly or indirectly in the stock markets.

It would not be an exaggeration to say that there was no activity in the Indian markets without the presence of FPIs before the liberalization policy. There is no denying the fact that trusting the stock market to foreign investors has continued to pose risks to the markets. Market players are more interested in information about how active foreign investors are than domestic investors. FPIs also make their investment decisions keeping various factors in mind. It does not take long for FPIs to turn to the markets where they find an opportunity to release more returns, so the policymakers of the country have to ensure that FPIs do not spoil the environment of our country's markets by making money in our own country.