By Soni 
The selling by FIIs (Foreign Institutional Investors) in the Indian Stock Market in recent months has shaken the market. Nifty50 has fallen by about 11%, but despite this, foreign investors are not returning to the market. This raises the question, why are FIIs withdrawing money from the Indian market, and is this a warning sign for the Indian economy? Let us understand this issue in detail.
FIIs Exodus From Indian Market: Key Reasons
Investment Trend in China
FIIs have increased investment in China since 2021. FDI (Foreign Direct Investment) and FIIs flow to China had slowed down for some time, but now they have made a comeback. Foreign investors feel that they can get better returns on their investments in China.
Depreciation of INR
The Indian Rupee (INR) is continuously weakening against the US Dollar (USD). INR has depreciated by 45% since 2014. When FIIs invest in the Indian market, they have to convert their capital into rupees. When they convert it back to dollars, currency depreciation affects their returns.
Taxation uncertainty
FIIs are facing high tax rates in the Indian market. Long-term capital gains (LTCG) tax has been increased from 10% to 12.5%. Apart from this, uncertainty over tax policies is also keeping FIIs away from the market.
Currency Depreciation and its Implications for Investors
Currency depreciation has a direct impact on both foreign and domestic investors. If an investor invests Rs 100 crore and INR depreciates by 4% annually, the actual return on their capital reduces over four years. Moreover, their net returns further reduce due to higher taxation and other charges.
Example:
If an investor earns a return of 16%, their net returns after tax and currency depreciation may be as low as 11%.
Mathematics of Inflation, Taxation and Hurdle Rate
Investors need a return of at least 16.2% in the Indian market to avoid the effects of inflation, depreciation, and taxation.
- Inflation: Annual inflation in the Indian economy is around 6%.
- Currency Depreciation: INR is weakening by 4% every year.
- Taxation: Tax rates for the high income group are up to 30-35%.
Due to all these factors, FIIs are not getting the expected benefits from investing in the Indian market.
Relation between Indian market and income growth
Some experts argue that salary growth in India has balanced the effect of currency depreciation. However, this does not apply equally to everyone. If a person’s salary and investment income is less than 16.2%, their purchasing power may decrease.
Signs for Indian economy
The trade deficit and lack of exports in the Indian economy have further deepened the problem of currency depreciation.
- Trade deficit: India’s imports are more than exports.
- International dependence: Consumption of imported goods such as oil and electronics has put pressure on the Indian currency.
- Market cyclicity: Every market is cyclical, but the Indian market has recently seen its peak.
Message for investors
The withdrawal of FIIs and the current situation of the Indian market indicate that investors should be cautious. Retail investors have to understand that they have to increase the rate of return on their investments keeping in mind the impact of inflation, depreciation and tax.
If structural reforms do not take place in the Indian market, foreign investors may distance themselves further. This can also be an opportunity for retail investors, provided they approach their investments with a long-term perspective and keep these challenges in mind.
Conclusion:
FIIs’ exodus from the Indian market is a result of several factors, including currency depreciation, taxation and other market-based challenges. Retail investors should tailor their strategies to these challenges and focus on long-term returns to protect their assets.