Financial services bears the brunt of Foreign disinvestment

According to data sourced from National Securities Depository Limited Foreign Portfolio Investors are vehemently pulling out investments from various sectors in the Indian market, but the financial service is facing a major selling spree bearing the brunt of outflow. As per the report, Foreign portfolio investors sold approximately 24,000 crore in the Indian market with financial services accounting for over 40% of the outflow. Due to foreign investors’ exit from banking and finance stocks, the BSE Bankex index, which tracks the performance of banking stocks, fell by over 5% in January, making it one of the worst performing sectors in the month.The outflow from financial services is a continuation of the 2022 trend when foreign investors sold over ₹1.5 lakh crore in the sector, almost entirely. The selling pressure is certainly coming from many factors, including the continued rise in interest rates across the world, making it less appealing for foreign investors to buy Indian stocks.True to life spoke to Mr. Rohan Shah, a fund manager at a leading asset management company, to understand why foreign selling in financial services was happening. “The rise in interest rates globally has made Indian stocks less attractive to foreign investors,” said Mr. Shah. He further added that the valuation of stocks of Indian Financial services are much higher as compared to their global substitutes, the price difference hence makes the Indian stocks less attractive to the foreign portfolio investors leading to continuous liquidation and outflow of investments. FRAMING OF THE PARA IS NOT UPTO THE MARK. IT’S KINDA MISLEADING. PLEASE FRAME THIS PROPERLY. Mr. Shah said that the foreign selling has definitely had an impact on the Indian market, particularly in the financial services sector. However, a lot of facts to note is(are) that domestic investors have been buying into the market, and hence the impact of foreign selling has been cushioned a bit more.Foreign selling has also been criticized on the premise of the possible effect on performance. Financial services is a prominent sector that makes up a great percentage of the Indian GDP; therefore, it will be worse if the slowdown is reflected from the sector and impacts the rest of the economy.But Mr. Shah remains positive about the performance of the sector. “Though the sector has faced a serious impact from foreign selling, we feel that the fundamentals of the Indian banking sector are sound. The sector has witnessed tremendous asset quality improvement, and banks are adequately capitalized. We feel that the sector will perform well in the long term.”In conclusion, foreign selling in financial services is still a matter of concern for the Indian market. However, domestic investors buying from the market have cushioned the impact of foreign selling. Though the short-term performance may be impacted by the outflow of foreign investment, the roots of the Indian banking sector are very strong, and we expect the sector to do well in the long term.The Indian government and the regulatory bodies have also taken several steps to attract foreign investment and improve the business environment. It has introduced various reforms, including the relaxation of foreign investment norms and the introduction of a new insolvency law. RBI after its monetary policy committee’s meeting headed by RBI Governor Sanjay Malhotra, has slashed the repo rate by 25 basis point to 6.25% and the move is aimed at containing the ongoing dent in investors’ sentiment.“As the rate cut did not spring any major surprise, investors did not find anything interesting in the new RBI governor’s comments which resulted in a steady bout of profit-taking in banking, oil & gas, FMCG and power stocks. The ongoing earnings have been mixed to subdued while relentless selling of domestic shares by the FIIs has prompted investors to maintain caution,” Prashanth Tapse, Senior VP (Research), Mehta Equities Limited, said.As the Indian market continues to change, it becomes evident that the foreign selling in financial services is going to be an important trend to watch. While the immediate impact may not be positive, the long-term fundamentals of the Indian banking sector remain strong and we expect this sector to do well in the long term.