Why FPIs turned net buyers in November

What has driven the FPI flows in the November 2022

The last time FPI (foreign portfolio investors) flows were smartly positive was in the month of August 2022, when FPIs infused $6.44 billion. In the months of September and October 2022, the flows were weak to negative with the second half of the month offsetting the inflows in the first half. However, November has been a pleasant surprise in terms of FPI flows as is evident from the table below.

Data Source: NSDL

The FPIs have infused $3.71 billion till date in the month of November 2022 with most of the flows coming through the secondary markets, despite the IPOs having picked up in the month of November so far. What is it that has driven the FPI flows in the month of November 2022 and can it match the flows of $6.44 billion in August 2022.

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Fed language has been less than hawkish

One of the big drivers for FPI flows in the month of November was the less-than-hawkish language of the November Fed statement. While the Fed still insisted on continuing rate hikes till inflation came down appreciably, it hinted that the pace of rate hikes might slow. Most likely, we are likely to see a more subdued 50 bps rate hike in December and, perhaps, a few hikes of 25 bps after that. That is far from turning dovish, but the aggressive stint of 75 bps rate hike for 4 meetings in succession may have come to an end. That boosted the US markets, especially the NASDAQ, and had its rub-off effects on Indian flows too. At least, FPIs are starting to get less risk-off in their approach.

Indian macros are still encouraging on a relative scale

With the RBI lowering the growth forecast for FY23 to 6.3-6.5%, there are broad concerns over the pace of growth in next two years. However, World Bank and IMF; as well as rating agencies like Moody’s, have pegged Indian growth to be at least 350 to 400 bps above that of China for 2022. That should make the India the fastest growing large economy in the world by a margin. Q2FY23 numbers may have been dominated by the financials, with BFSI accounting for 42% of the profits in the quarter. However, the good news is that interest costs and input costs may be peaking or close to the peak. Also, the rather robust domestic Indian market would be a hedge against weak global export demand.

Rupee was oversold and that favoured FPI flows

In the last 1 year, the INR has been among the currencies under a lot of pressure. It fell from 74.50/$ in November 2021 to as low as 83/$ in November 2022, resulting in the rupee weakening around 10.4% in a year. However, this is at a time when the Indian 10 year bonds are offering a real return of 1% while the US benchmark bond offers -3.9% net of inflation. Such a huge gap in real returns did not justify a sharp fall in the rupee, which led to the sharp appreciation in the INR from 83/$ to 80.5/$ in a short span of time. When rupee is oversold, it gives a dual arbitrage to FPIs as they can gain from stock prices and also from rupee bounce. That also triggered FPI inflows in November 2022.

FPIs bet big on the fundamental India story

Most FPIs concede that India may be one of the few economies with a secular growth story. For instance, the huge domestic market is a major growth driver for the Indian economy making it less vulnerable to global fluctuations. Secondly, India is outsourcing at a frenetic pace and microchips and electronics are just the start. The Make in India initiative and the PLI are likely to give a big push to India emerging as a manufacturing hub. What does all this add up to? Indian economy is poised to boost its GDP from $3.4 trillion to $5 trillion in the next five years. That is a lot of growth still left to happen. FPIs would not want to miss this low hanging fruit. That is likely to drive FPI flows in the future.