Despite healthy growth in earnings, credit issuance and improvement in asset quality in the second quarter, foreign investors remain pessimistic about India’s banking and financial services sector.
Foreign portfolio investors (FPIs), who withdrew ₹4,081 crore from the sector in the first two weeks of October, have been on a massive selloff in Indian equities since October 2021, amid high inflation and aggressive monetary policy tightening by the Fed US and geopolitics. tensions due to the Russia-Ukraine war.
FPI sales at a slow pace; issued ₹1,586 crore from equity in October
FPIs were net buyers of ₹51,200 crore in August.
Their sell-off picked up at the start of the current fiscal as more global macro-economic challenges, including China’s slowdown and a slowdown in global growth by multilateral institutions, forced foreign investors to pull money from developing economies, including India, into safer asset classes in the domestic market. .
After disbursing ₹38,522 crore in Q1FY 23, FPIs turned net buyers in the banking & financial services sector in July and August, with net investments of ₹1,014 crore and ₹12,799 crore, respectively. In September, foreign investors again turned into net sellers in the sector, with marginal outflows of ₹1,673 crore.
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“When FPIs go into sell mode, they sell from their largest holding segment, which is the financial services sector. The 2-year US bond yield is currently at 4.4 percent. If the world’s safest asset is giving a risk-free return of 4.4 per cent, it is rational to sell and everything else becomes secondary,” said VK Vijayakumar, Head of Investment Strategist, Geojit Financial Services.
He, however, added that from a medium to long-term perspective, it may be a short-sighted policy as the financial services sector, especially banking, has been performing well in India and is set to continue its performance.
Healthy Q2 results
All major banks have posted healthy results in the second quarter of the current fiscal as they continue to emerge from a pandemic-led slowdown in credit growth and corporate debt disposals.
The country’s largest private sector lender HDFC Bank posted a 20 percent growth in Q2 net profit at ₹10,605.8 crore, while ICICI Bank posted a 37 percent growth in its net profit at ₹7,558 crore. Axis Bank’s Q2 net profit zoomed 70 percent year-on-year to ₹5,330 crore in the July-September quarter.
These lenders have recorded impressive growth in their loan books across retail, corporate, rural and MSME loans. Although the asset quality of these lenders has also improved significantly, signaling a strong recovery and a decline in new slippages.
FPIs reduce exposure in private banks
FPI shareholdings in many private sector banks have also declined due to continued selling in the sector. FPI holdings in Bandhan Bank fell 4 percent to 30.15 percent between March and September 2022, while foreign investors’ holdings in HDFC Bank fell 3 percent to 32.12 percent. While Axis Bank and RBL Bank saw FPI holdings fall by one per cent, their stakes rose by 1 per cent in ICICI Bank, YES Bank and IndusInd Bank, between the March and September 2022 quarters.