India-focused offshore funds and exchange-traded funds (ETFs) experienced a net outflow of USD 1.28 billion in the three months ended March 2022, making it the 16th consecutive quarter of withdrawal, according to a Morningstar report released on Monday. This was way higher than the net outflow of USD 435 million registered during the December 2021 quarter.
Escalation in geopolitical tensions due to the war between Russia and Ukraine, hikes in interest rates by the US Fed along with its hawkish guidance, volatile crude prices, and surging inflation globally, among other causes, prompted investors to turn risk-averse during the quarter under review, the report noted.
Subsequently, investors began to move out of the emerging markets such as India, which are relatively riskier and more prone to such challenging times, and they began to invest in safe-haven investments, such as gold or the US dollar, it added.
India-focused offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in the Indian equity market. Through the calendar year 2021, the India-focused offshore funds and ETFs category had a net outflow of USD 2.45 billion, sharply lower than the net outflow of USD 9.26 billion recorded in 2020.
During the three months ended March 2021, the India-focused offshore fund segment witnessed a net outflow of USD 800 million compared to the net inflow of USD 638 million in the preceding quarter. Given the challenging environment on the global and domestic fronts, India-focused offshore ETFs also experienced net outflows of USD 475 million during the quarter.
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This was in stark contrast to the previous quarter when the segment had net inflows of around USD 203 million. Flows into offshore funds are generally considered to be long-term in nature, whereas flows into offshore ETFs indicate predominantly short-term investment. Going ahead, the future trend of the flows in the India-focused offshore fund and ETF category would revolve around how it fares against comparable economies on the growth prospects from a long-term perspective, the report explained.
Some of the factors — such as how the scenario unfolds on global inflation and the economic growth front, and subsequently, the US Fed's decision to hike interest rates further — will be closely watched by foreign investors, it said.
"How long the geopolitical scenario remains as is due to the war between Russia and Ukraine will also have an impact on flows into India-focused offshore funds and ETFs category," it added.
Also, on the domestic front, the buildup of inflationary pressure has already led to a rate hike by the RBI. Hence, investors will now focus on how the country navigates this path of economic growth. In addition, the assets of India-focused offshore funds and ETFs declined during the quarter under review on correction in the Indian equity markets in the large and mid-cap segments, coupled with net outflows.
Through the quarter ended March 2022, their asset base declined by 7 percent to USD 46.7 billion from USD 50.4 billion in the December 2021 quarter. Of the overall current asset base of USD 46.7 billion, India-focused offshore ETFs accounted for USD 10.8 billion, whereas India-focused offshore funds accounted for USD 35.8 billion.
