May-June 2023 Bring $11 Billion FPI Inflows

FPI flows surge in May and June 2023

For a full 9 months between October 2021 and June 2022, the foreign portfolio investors (FPIs) were net sellers. They took out close to $34 billion from Indian equity markets during this 9-month phase. Year 2023 began on a dull note with FPIs selling in January and February. GQG Partners led to positive flows from March onwards. However, the months of May and June 2023 have seen massive FPI flows into Indian equities. May 2023 saw FPI inflows of $5.30 billion and June 2023 witnessed FPI inflows of $5.74 billion. In short, $11 billion of FPI flows came into Indian equities in 2 months. It was not just in equities, but FPIs were net buyers in debt also. They infused close to $2 billion into Indian debt. As of the end of June 2023, FPIs have been net buyers in India to the tune of $11 billion in debt and equity, after offsetting the selling in January and February.

How FPI flows turned around in 2023

The table captures monthly FPI flows into equity and debt for 2022 and 2023, with the latter being month-wise.

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

The year 2023 began on a dull note with FPIs net sellers of Rs28,852 crore in equities. The selling continued in February but March saw a turnaround. However, the March flow was largely accounted for by the $2 billion infusion by GQG Partners into the Adani group. If that was removed, FPIs would have been net sellers in March also. Things actually turned to genuine positive flows in April, but May and June have broken recent records with $11 billion inflows into equity in just 2 months and around $13 billion overall in these 2 months (including debt). Clearly, the year 2023 appears to be different; but what has triggered the inflow.

What explains this surge in FPI flows?

Here are some of the major triggers explaining this surge in FPI interest in India.

• Firstly, the lower than expected current account deficit (CAD) for the March 2023 quarter came as a whiff of fresh air. At 0.2% of GDP for Q4FY23 and at just 2% of GDP for FY23, the CAD is a lot more comfortable than originally anticipated. Remember, high CAD, can weaken the rupee, subdue FPI flows and raise rating concerns. 
   
• Why are FPIs turning risk-on in Indian markets. The broad bet is that global rates may be close to the top, if not already at the top. Indian real interest rates are already attractive and that gets better with inflation in check and the rupee stable. That has boosted FPI demand for Indian equity as well as for Indian debt. After all, inflation in India is just 25 bps short of the RBI target rate.
   
• Fundamentally, there is the Goldilocks economy effecting working in India’s favour. Inflation is lower than expected and IIP is better than expected. High frequency data points like Composite PMI, GST collections, e-way bills and freight data are positive. The US GDP for Q12023 being upgraded by 70 bps to 2% also adds to the feel-good factor.
   
• If there was one corporate-level event driving the markets, it was the HDFC Bank / HDFC Ltd merger. That had led to a lot of buying last week on possible index inclusions. It also heralds Indian coming of age in terms of global scale. Post-merger, HDFC Bank will be the fourth most valuable bank in the world by market capitalization, and that is a good paradigm for Indian banking in the future.

Apart from these factors, the stable rupee also helped. The rupee was partially helped by flows and partially by RBI intervention. The bottom line is that, the stable rupee has helped FPIs to protect their gains. 

How will FPI flows pan out in the second half?

While the positives have been adequately discussed, there are also risks to FPI flows. FPIs allocate across emerging markets and they are quite agnostic about such decisions. Therefore, one factor that will play on the minds of FPIs is global hawkishness. Central banks, today, are more than willing to use rate hikes to fight inflation as that looks like the lesser monetary evil. Hence, the recession possibility cannot be ruled out. In India, monsoons have been delayed and while sowing is catching up, the impact on paddy acreage is likely to be palpable. That has implications for food grain production and for food inflation. Weak agricultural output also has an impact on rural demand and impacts sectors like FMCG, two-wheelers, tractors, and consumer goods. 

IT will be the one sector that the FPIs would be closely watching out for. This sector has been lying low for some time and domestic funds are betting big on this sector. However, FPIs are still sceptical. They are assessing the impact of global spending on Indian IT companies. In FY23, it was services exports that made up for the merchandise deficit and it was led by the IT sector. However, FPIs are still cautious about IT demand and pricing. This one sector could hold the key to FPI flows in 2023.