Domestic Bonds

Rupee under pressure as REITs rush for exit door and withdraw Rs 2 lakh crore since October

The ongoing sell-off by Foreign Portfolio Investors (REITs) has led to the withdrawal of more than Rs 2,00,000 crore from the domestic stock markets since October last year. The Russian-Ukrainian conflict has added to the nervousness of REITs, which are already bracing for interest rate hikes by the US Federal Reserve. The FPI’s pullback hit the rupiah, with its exchange rate against the dollar falling below the 76 level at 76.16 despite heavy intervention from the RBI.

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On March 4, REITs withdrew Rs 7,631 crore from stock markets, bringing total outflows to Rs 18,614 crore in the last three March sessions as Russia stepped up the attack on Ukraine and oil prices were skyrocketing. This exit came after the withdrawals of

Rs 45,720 crore in February and Rs 41,346 crore in January. With that, REITs pulled out

Rs 2,06,646 crore (excluding REIT investments in IPOs) since October 1, 2021.

If the situation in Ukraine worsens and REIT sales continue, the rupiah will break through the 77 level against the dollar in the coming days, analysts say. While banks bought dollars to facilitate the withdrawal of the REIT, the RBI sold dollars from its forex pool to save the rupee, a banking source said.

During the week ended February 25, India’s foreign currency holdings decreased by $2.228 billion. “The Russian-Ukrainian conflict hurts the Indian rupee, bonds and stocks through three channels: oil prices, the US dollar index and global stock prices,” said a report from Kotak Securities.

Analysts said there could be another temporary shock if things get worse in Europe or, for that matter, if a new front opens in Asia. While the rupee is expected to remain under pressure, the RBI with its $631 billion forex kitty will be able to prevent a sharp decline in the currency.

However, domestic institutional investors (DIIs), led by LICs, mutual funds and insurance companies, stepped up their buying, absorbing most REIT sales. “There is a tug of war between REITs and DIIs,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

Against the REIT strategy, DIIs invested Rs 12,599 crore from March 1-4, adding to their total investments of Rs 1.42,872 crore since October 2021. DIIs invested a record amount of Rs 42,084 crore in February, their highest monthly investment since putting Rs 55,595 crore in March 2020 when the Covid pandemic hit the country.

Despite a roughly 13% correction from Nifty’s peak, REITs continue to sell off as market sentiment has been impacted globally by war-triggered uncertainty and soaring crude prices. This is likely to impact the IPO market and LIC’s plan for listing this fiscal year and drive up the current account deficit (CAD).

The Sensex has already fallen 5%, or 2,899 points, to 54,333.81 since February 24, when the Russian invasion of Ukraine began. Global markets are spooked by events happening in Europe, causing volatility. “REITs have been sellers for almost 6 months now. Commodities are skyrocketing across the board – oil, coal, metals and agricultural commodities,” said Vineet Bagri, Managing Partner, TrustPlutus Wealth.

The withdrawal of the REIT dampens sentiment in the equity and currency markets. “Their impact on the markets is visible, with increased volatility and falling stock prices. However, the fact that these sales by foreign investors have been absorbed by domestic investors bodes well for the outlook for Indian markets,” Bagri said.

According to a Morgan Stanley report, supply-limited oil price increases are bad for India. Indeed, the recent 25% rise in oil prices will increase the current account deficit by 75 basis points and inflation by 100 basis points on an annualized basis, he said.

US Federal Reserve Chairman Jerome Powell recently said he would support a quarter-point rate hike when the Fed meets on March 15-16, ending the debate over launching a series of post-pandemic rate hikes with a half-point increase larger than usual.