The year 2022 has been a volatile year so far. After a more than 21 per cent rally in the BSE Sensex in CY 2021 it was expected that some sort of consolidation may happen in the market. However, the real trigger happened in the form of a geopolitical situation that we are still dealing with in the form of the Ukraine - Russia war. The war led to unprecedented disruption in the supply chain globally, similar to the situation faced by the global economy during the peak of the pandemic. This supply chain disruption led to volatile spikes in the commodity prices due to which the inflation figures soared.
The unexpected rise in inflation led to US Federal Reserve and global central banks to take remedial action by raising interest rates. Such earlier-than-expected increase in interest rates created a negative sentiment amongst the global investors. Whenever a global situation happens that has the potential to impact the global economies negatively, the tendency of investors is to remove money from supposedly risky assets and park the funds in the safe havens. Traditionally, equity is termed as a risky asset while gold and fixed income securities can be considered as less risky assets.
When any geopolitical situation arises it is normal for global investors to withdraw money from the emerging markets and park the investment proceeds into what may be considered relatively less volatile. Now, when we consider the investments of the FIIs in India, there are essentially two types of risks undertaken by the investors - currency risk and market risk. Thus, investing in emerging markets like India becomes an extremely volatile proposition for the FIIs when we consider the currency volatility as well.
If we look at tables below, we get a fair idea of how heavy the selling has been in India by the FIIS:
Stocks with FII Exposure
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