Why is Sensex rising despite Ukraine-Russia war, FPI outflows, high inflation and Fed rate hike?

Even as the Russian invasion on Ukraine continues, domestic CPI inflation is above 6 per cent, the Federal Reserve has raised rates and foreign portfolio investors have pulled out Rs 41,123 crore in March (highest monthly outflow in last two years), the Indian markets witnessed a smart recovery and closed at a two-month high of 59,276 on Friday. On the back of this recovery is the small retail investor and the DIIs who have more than made up for the FPI outflow seen in the last two months.

The benchmark Sensex at BSE and Nifty at NSE rose 1.2 per cent on Friday and are trading above the pre Russia-Ukraine war levels. A day before Russia invaded Ukraine on February 24, the Sensex closed at 57,232 and as the war intensified it fell sharply to close at 52,842 on March 7.

Why has the market risen?

The biggest factor for the recovery over the last few days has been news reports of positive developments in the discussions between Russia and Ukraine. The other key factor for the market’s improving sentiment has been the fact that the war did not escalate beyond the two nations, which was initially speculated.

As reports of possible truce between the two nations at war emerged, the oil prices too have corrected and from a level of over $132 per barrel on March 8, they have now cooled down to levels of $105 per barrel. On Friday, Brent crude price was trading at $103.5 per barrel.

Decline in Brent crude prices lifts the sentiment in Indian equity markets as India is a big oil importer – importing around 85 per cent of its requirements – and a softening in crude oil price provides a breather to the Indian economy.

Why have markets risen despite FPI outflow?

In January the FPIs pulled out a net of Rs 33,303 crore from Indian equities. This rose to an outflow of Rs 35,592 crore in February and further to Rs 41,123 crore in March. The outflow in March 2022 is highest in a month since the outflow of Rs 61,973 crore seen in March 2020, when India announced a lockdown following the pandemic outbreak.

It is, however, important to note that over the last two years the retail equity penetration has deepened significantly and the demat accounts have more than trebled from 1.97 crore accounts in December 2019 to 6.07 crore accounts at the end of February 2022.

This rising retail participation into direct equity investment and through mutual funds is leading to a broadening of participants in the market and is playing as a counterbalance to FPIs.

For example, while FPIs pulled out a net of Rs 76,715 crore between February and March 2022, the DIIs invested a net of Rs 81,761 crore in the same period, thereby making up for more than what was pulled out by FPIs.

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It is also important to note that the FPI outflow over the last two weeks has tempered after the Fed announced its rate hike and indicated six more hikes this year. While FPIs pulled out Rs 42,079 crore till March 17, there has been a net inflow of over Rs 950 crore over the last two weeks. Experts say that the FPI outflow that was expected in anticipation of rate hike has already happened and the decline in FPI outflow has also resulted in the sharp recovery. Since March 15, the Sensex has jumped 3,500 points or 6.2 per cent on the back of DII inflow and dip in outflow by FPIs.

What should investors do?

While the war still continues and there is no real outcome of the discussions between the two warring nations, investors need to tread carefully. A sudden escalation of war and rise in crude oil prices could again dent the markets and hence investors should simply follow the mantra of steady SIP mode of investment and that too with an investment horizon of at least three years.

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Divyansh Singh

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