For instance, FPIs withdrew Rs1.21 trillion from Indian equities in calendar year 2022 overall. However, if you break up the year into two halves, H1-2022 saw net FPI selling of Rs2.17 trillion while H2-2022 saw net FPI buying of Rs0.96 trillion resulting in overall FPI selling in 2022 at Rs1.21 trillion. The months of November 2022 and December 2022 saw equity inflows of $4.45 billion and $1.35 billion respectively.

In comparison, the month of January 2023 was fairly disappointing. January 2023 saw total FPI selling of $3.54 billion. The selling was evenly distributed through the month with the first half of the month seeing FPI selling of $1.85 billion and the second half seeing FPI selling of $1.69 billion. This is almost reminiscent of the period between October 2021 and June 2022; when the FPIs had withdrawn $34 billion from Indian equities. Whether January 2023 sets the trend for calendar 2023 or whether we see a turnaround in FPI flows remains to be seen. But, first let us look at assets under custody of FPIs.

How does assets under custody (AUC) look sector-wise?

It must be remembered that the assets under custody (AUC) is the closing market value of all the equities held by the FPIs. That means, AUC is a function of flows and also stock market performance. The AUC of FPIs peaked at $667 billion in October 2021 and fell to as low as $523 billion in June 2022. Between June 2022 and November 2022, the AUC rallied by 16.8% to $611.11 billion; amidst positive inflows and a rally in the benchmark indices. The market correction in December 2022, took the AUC lower to $583.97 billion and as of the close of January 2023, the AUC has fallen further to $563.13 billion. FPI AUC is currently 15.6% below the peak. Here is the latest AUC standing, sector-wise for the FPIs.

Data Source: NSDL

The table above captures the top 13 sectors with AUC above $10 billion. NSDL has pruned the list from 40 sectors to 23 sectors. Out of these 23 sectors that FPIs invested in, AUC of the top-13 sectors accounted for 92.7% of total FPI AUC of $563.13 billion. The January 2023 AUC at $563.13 billion is down -3.57% compared to the sequential December 2022 AUC. 

The BFSI space, comprising of banks, NBFCs and insurance accounted for 32.85% of overall FPI AUC. That is also the approximate weight of BFSI in the Nifty. The other significant AUC contributors were Information Technology $63.26 billion, Oil & Gas $59.62 billion, FMCG $39.49 billion, Automobiles $33.32 billion, Healthcare $27.81 billion and Power $20.89 billion. While FMCG AUC was stable, the automobiles sector and the IT sector saw smart growth in AUC for the month of January 2023. 

FPI flows in January 2023 was deeply in the negative at $3.54 billion, with relentless selling in the first and the second half of the month. Let us now turn to the sectors that received positive flows in the month. Metals was a sector that saw net FPI inflows of $535 million in the January 2023. This was largely led by China exiting COVID curbs and the likelihood of a boost to Chinese economy translating into higher metal prices on the LME. The impact was already visible on the LME. The other two sectors to witness positive flows in January 2023 were automobiles and construction.

Construction companies are finally coming out of fairly prolonged curbs on contact intensive sectors. That is changing and the consumer demand for housing is picking up. That helped positive flows into the construction sector. The surprise package was the auto sector which saw good buying ahead of the demand numbers exceeding the supply, resulting in a bounce in the auto prices. Also, a lot of expectations were built around the budget giving support to EV, which eventually did materialize.

FPIs sell heavily into financials in January 2023

The BFSI sector comprising of banks, NBFCs and insurers saw bulk of the net outflows in the month of January with the BFSI sector alone seeing outflows of $1.86 billion. Other sectors that saw significant outflows included oil & gas at $931 million, Consume Durables at $340 million, Telecom $282 million,  IT sector $263 million and Consumer Services $191 million for the month of January 2023. FMCG and other miscellaneous services also witnessed selling. BFSI was a clear case of FPIs trimming their positions in NBFCs and insurance, where valuations have been steep for some time. The Adani saga only worsened the fall and the FPI selling in the market. 

Tracking FPI flows into India in year 2023

Data Source: NSDL (all figures in $ million)

In our previous note, we had estimated a bounce back in FPI flows in 2023. However, the month of January has begun on a rough note with FPI selling of more than $3.50 billion. What exactly has forced this aggressive selling in equities by FPIs?

• The concerns over central bank hawkishness are still prominent. Fed has reduced the pace of rate hikes, but it is not clear whether the Western economies would get into a full-fledge recession, in which case risk-off investing could be the narrative.
  
   
• Indian Q3 results have shown a lot of pressure with margins still under strain due to higher input and operating costs. While banks continue to dominate the profit with solid growth in NII and NIMs, other sectors have borne the brunt.
  
   
• With the Adani group having lost more than half of its market cap and the carnage far from over, that could be an overhang for FPI flows in the coming months. Most of the FPIs have been aggressive sellers in Adani group on negative news flows.
  
   
• The last few months have seen valuation concerns expressed by the FPIs as many of them have been net buyers in Asia, especially  in countries like South Korea, Taiwan, Hong Kong and Indonesia. This reallocation also led to FPI outflows from India.
  
   
• The one thing really spooking the FPIs is the elevated levels of inflation in India. That means the hawkishness in India could go on longer and the pressure on cost of funding will remain. That is putting pressure on FPI flows.

FPI selling pressure was palpable in January; and February has stared on a weak note. However, with 7% GDP growth, macros are surely favorable. The budget has been positive and state election triggers would hold the key in the short term.

• The neutrality of FPI flows into equities was largely driven by IPO flows. The IPO market finally saw action in the month, but more importantly, there was genuine FPI interest in the QIB quota and also in the anchor allocation of IPOs. The IPO flows almost entirely neutralized the secondary market FPI outflows.
• Debt markets continued to see outflows for two reasons. Firstly, the hawkish stance remains a concern for debt investors. Secondly, the non-inclusion of Indian bonds in the JP Morgan Global Bond indices resulted in a lot of hot money flowing out of debt.
• While rate hikes in the US and Europe are still a concern, there is now an expectation that 5% would be the worst case scenario for Fed rates. Markets would now be concerned only if the rates go seriously beyond 5%, which looks unlikely at the moment.

1. Fed hawkishness is still a concern and that is not going away in a hurry. Now it is almost like a hawkishness pandemic with the US, UK and even the EU raising rates aggressively to contain inflation. However, there is also a gnawing realization that this has to end sooner rather than later, as growth concerns would have take precedence.
2. In the Indian context, the Bloomberg report that inflation may have been overstated, helped the cause a bit. According to the report, Indian consumer inflation may have been overstated by 150 basis points due to the impact of the free food program not being factored in. Also Russian oil impact is not fully factored in. That could change the equation sharply in favour of Indian equities.
3. Something is changing in the way the world is doing business as investors are increasingly looking at India as a manufacturing hub. In the last few months there have been a slew of deals in sectors ranging from microchips to aerospace. That is likely to be a new theme that could provide the growth bandwidth to the Indian economy.