FPI sector buying and selling in January 2023

Heavy FPI selling seen in January 2023

FPIs overall sold equities worth $3.54 billion in the month of January 2023, coming on top of FPI selling of $16 billion in year 2022. Unlike the previous year where the first half had seen outflows and the second had seen inflows, there was no such ambiguity in FPI flows in January. The first half of January 2023 saw FPI outflows of $1.85 billion while the second half  of the month saw FPIs selling $1.69 billion of Indian equities. This was almost reminiscent of the heavy FPI selling of close to $34 billion between the months of October 2021 and June 2022. One can say that the selling in the month was also exacerbated over the Adani issue, but the selling was much bigger than that with banks and financials bearing the brunt.

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Banking and oil & gas saw most selling in January 2023

Data Source: NSDL

Why did banks and hydrocarbons attract the bulk of the selling. In the case of banks and financials, it was a mixed bag. Most banks gave up gains on high valuations and fears of an overexposure to the Adani group. In the case of oil & gas, the concerns were centred around the likely fall in the price of oil and the possible impact on oil companies. In the latest quarter, even Reliance Industries had faced margin problems due to pressure on its costs and the impact of SAED (special additional excise duty). Consumption related sectors continued to remain on the sell list of the FPIs. However, it is the sectors with the maximum global exposure that bore the brunt of the FPI selling in January. January was about an across the board selling in Indian equities, as FPI flows converged to rest of Asia. On the positive side, metals saw some buying on China revival hopes, but otherwise, there was limited traction on the buy side from FPIs.

What triggered this heavy FPI selling in January 2023?

Broadly, there were 4 macro reasons for the sharp FPI selling in January 2023.

1. Central bank hawkishness is still a big risk and recent actions from the Fed and BOE suggest that while rate hikes have slowed, they are fear from peak levels. That is likely to put the RBI in a quandary ahead of the February MPC meeting.
   
    
2. You cannot miss out mentioning the Adani group, which has lost more than half of its market cap and the carnage looks far from over. This is not only hitting the FPI exposure to Adani group, but also the banks and lenders with exposure to Adani group. 
   
    
3. Valuation concerns are back, especially in the light of the weak profit growth in the non-bank space. A number of FPIs have turned net buyers in Asian economies like South Korea, Taiwan, Hong Kong and Indonesia. This reallocation also triggered FPI outflows.
   
    
4. While Q3 results have shown margin pressure, much of this is coming from higher finance costs. That is not great news as it adds to the solvency risk of Indian companies. The government is also in a policy dilemma since inflation continues to be elevated, making it a tough choice for Indian policy makers. 

Brief on the AUC as of January 2023

Assets under custody (AUC) is a function of flows and market performance. From a peak of $667 billion in October 2021, the FPI AUC fell to a low of $523 billion in June. The sharp index correction in January 2023, took the AUC lower to $563 billion. 

Data Source: NSDL

Out of a total of 23 sectors identified by NSDL, the top 13 sectors accounted for 92.7% of total FPI AUC of $563 billion. Not surprisingly, the financials (banks, NBFCs and insurance) accounted for 32.85% of overall FPI AUC, which is in sync with their weight in the Nifty index also. Other major contributors to FPI AUC were Oil & Gas, Information Technology and FMCG. In fact, barring FMCG, IT Services and Metals; all other sectors saw AUC tapering in January 2023. 

Where does that leave FPI flows for February. The pressure of the Adani saga will continue on the stock. However, the 7% GDP growth and the emergence of a $5 trillion economy, apart from a vast domestic market remain an attractive narrative for Indian markets. Hopefully, FPIs should listen to that tune, sooner than later.