FPIs Withdraw ₹1.21 Trillion from Indian Equities

Sectors That Led and Sectors That Lagged in November 2022

FPI flows have been largely discouraging since October 2021. In fact, between October 2021 and June 2022, FPIs sold close to $34 billion of equities due to concerns that global central banks would turn hawkish amidst rising inflation. The FPI selling of 2021 continued well up to June 2022. That was the period when the central banks in the US and in India were aggressively hiking rates. At that point, the big concern was that the aggression could eventually translate into an economic slowdown.

The concerns have not gone. As we stand today, there are several headwinds like rising COVID cases in China, ongoing war in Ukraine, rising input prices, falling operating margins, hawkishness of central banks etc. However, evidence from the US and India suggests that higher rates have not really dented growth. The US economy turned around to positive real growth in September 2022 quarter after contracting in the first 2 quarters of 2022.

The big story in India was the sharp turnaround in FPI flows in the year 2022. Between January and June 2022, FPIs sold equities worth Rs 2.17 trillion. However, between July and December 2022, FPIs infused Rs95,919 crore into equities. FPIs still ended 2022 with net equity selling of Rs1.21 trillion, but sharply mitigated in H2-2022.

2022 FPI flows: How the tide turned in H2-2022

The table below captures monthly FPI flow trends in equity and debt for Calendar 2022.

Data Source: NSDL (all figures are Rupees in crore)

The big story of 2022 was how the FPI flow pattern turned in the second half of the year. There was aggressive selling between January and June but the tide turned from July onwards. In H2-2022, September and October saw selling in equities by FPIs on a net basis, but the other four months were good enough to compensate.

1. In the first six months of 2022 between January and June 2022, the FPIs sold equities to the tune of Rs2.17 trillion. This was triggered by factors like rising inflation, central bank hawkishness, the gap between US and India rates as well as the falling operating profits of Indian companies that resulted in a risk-off approach by the FPIs.
2. However, the tide largely turned in the second half of 2022 with FPIs infusing Rs0.96 trillion into equities resulting in overall net outflows in the year 2022 to the tune of Rs1.21 trillion. The second half was the redeeming feature for equities. The turnaround was despite most of the risks persisting, but confidence built up that the India growth story would be intact and India would still be the fastest growing large economy.
3. Debt market outflows by FPIs in calendar 2022 were to the tune of Rs12,122 crore with occasional concerns over negative real rates, risk-off investing and the non-inclusion of Indian debt paper into the global benchmark bond indices. 

The big story for 2022 was the turnaround in flows in the second half as concerns abated with the US also reporting a turnaround in growth. The good news for FPIs was that, despite the persistent rate hikes, real GDP growth has shown positive traction. 

Story of FPI equity flow trend in December 2022

The table below gives a granular encapsulation of the daily flows into Indian equities in December 2022; both in rupee and dollar terms. 
 

Data Source: NSDL

The month of December 2022 closed with net FPI buying in equities to the tune of Rs11,119 crore or approximately $1.36 billion. In the second half, four out of six months have seen positive inflows into equities with the months of August 2022 and November 2022 accounting for bulk of the FPI inflows. The million dollar question now is; what happens in 2023 and what factors will drive the FPI flows in year 2023?

What will drive FPI sentiments in calendar 2023?

Broadly, there will be a mix of 5 factors that will drive the direction and colour of FPI flows in the year 2023.

1. Fed hawkishness will still be a major issue. As of now, the Fed has indicated at another 75 bps of rate hike, probably in 3 tranches. That is likely to take the terminal rates in the US to closer to the 5.25% levels. That would be the highest in recent memory and likely to put a lot of pressure on global cost of funds.
2. Another factor that would also matter for FPI flows is how aggressively the Fed winds up its balance sheet. As of now, the winding down of the balance sheet is in progress but it is happening at a very tepid pace. If the Fed decides to compound its rate hikes with quicker winding down of stimulus, as is likely, it could squeeze global liquidity and negatively impact the flows into India from passive index funds and index ETFs.
3. Third quarter results will start from the second week of January 2023 and that will also be a key factor in this equation. In Q2 we saw pressure on operating costs and also on interest coverage ratio. Ex-banks, the situation was a lot worse. Q3 performance overall will largely depend on how the banks sustain their profit performance.
4. Inflation will hold the key, especially in how well the RBI is able to bring it closer to 4% median. In the current context, inflation control remains the best way to boost real GDP growth. Global commodity prices will matter a lot.
5. e) One less discussed factor is the current account deficit, which FPIs have been watching nervously after it scaled 4.4% of GDP in Q2FY23. While CAD may still be not controllable, positive signals coming from the Union Budget 2023 can make a huge difference. Year 2023 does remain an X-factor for FPI flows!