Indian markets are creating history of a different sort, and not too encouraging. The month of June 2022 marks the ninth successive month of net selling by foreign portfolio investors (FPIs). This is not only the longest spell of FPI selling in terms of the length but also in the intensity of the selling. But, we will come back to that point later.

During the last few months, it is hard to even recollect the number of days that FPIs were net buyers. Even at the peak of the COVID sell-off, the bounce from the lows of March 2020 was led by a sharp revival in FPI buying. However, since October 2021, there has been no respite in FPI selling. Forget about any bounce, the selling has just intensified.

A saga of 9 months of persistent FPI selling

The table below captures the monthly FPI flows since October 2021 with a break up of equity and debt flows. The equity flows includes net secondary market and IPO flows too.

Month	FPI - Equity	FPI - Debt	Net Flow	Cumulative Flow
Oct-21	-13,549.67	1,272.16	-12,277.51	-12,277.51
Nov-21	-5,945.10	3,448.49	-2,496.61	-14,774.12
Dec-21	-19,026.06	-10,407.62	-29,433.68	-44,207.80
Jan-22	-33,303.45	3,080.26	-30,223.19	-74,430.99
Feb-22	-35,591.98	-2,586.30	-38,178.28	-1,12,609.27
Mar-22	-41,123.14	-8,876.35	-49,999.49	-1,62,608.76
Apr-22	-17,143.75	-5,613.91	-22,757.66	-1,85,366.42
May-22	-39,993.22	3,537.04	-36,456.18	-2,21,822.60
Jun-22	-50,202.81	-1,327.34	-51,530.15	-2,73,352.75
Grand Total	-2,55,879.18	-17,473.57	-2,73,352.75

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

Here are some key takeaways from table above.

• Over the last 9 months, total FPI selling has been to the tune of Rs273,353 crore or approximately $34 billion. That is one of the worst bouts of FPI selling seen in India.
• The secondary equity market selling was actually much higher during this 9-month period. Had it not been for IPO inflows, the numbers would have been a lot worse.
• Another feature is the building intensity. The month of June 2022, after the selling, marks the steepest selling by FPIs in equities and also in equity and debt combined.
• In the month of June 2022, the FPI flows into debt were negative due to the uncertainty over the trajectory of the RBI, giving rise to worries over real interest differentials.

The overall selling of Rs2.73 trillion in equity and debt combined marks the worst bout of FPI selling ever seen and even beats the selling seen around the COVID pandemic, the rupee panic of 2013 or the Global Financial Crisis of 2008.

Five reasons FPIs again sold off in June 2022

Normally, the aggressive selling by FPIs is never the outcome of any one factor but the confluence of several factors. Here are some interesting factors why the selling has been so intense.

1. Fed hawkishness has been one of the primary driving forces. The Fed had guided for over 300 bps of rate hike in 2022 and to its credit it has already delivered 175 bps. In short, the Fed is walking the talk. In the case of RBI, analysts believe that the Indian central bank may not go much beyond reversing the largesse of 110 bps during COVID and 90 bps out of that is already done. Hence the rate gap should only widen for the US bonds making them more attractive.
2. Inflation is another major factor in this equation. Let us understand why this factor is so important. India’s growth at 7.2% for FY23 is pegged to be the highest among the large economies with real GDP of over $1 trillion. But there is a small problem here. Most of the growth will be eaten away by persistent high inflation. Firstly, Indian inflation is not likely to come down in a hurry and secondly, the overt impact of imported inflation will continue to be pronounced on the Indian economy.
3. Thirdly, FPIs are becoming justifiably risk-off about most emerging markets. The contention of these FPIs is that as global yields rise, the impact of the borrowings will starting pinching emerging market governments. That is true of India, where the government has a massive of domestic borrowing program of Rs14 trillion in this year. That is something that is putting off the FPIs.
4. Fourthly, many FPIs are concerned that traditional valuation metrics like DCF and P/E ratio need a total rethink since the median cost of capital would have gone up sharply. That would mean discounting future cash flows at higher hurdle rates, leading to lower current valuations. This applies to all economies; just that emerging markets like India would be a lot more vulnerable to this adjustment.
5. Finally, there is the rupee factor and in the last few weeks, it is the weakness in the rupee that has been driving the FPI selling. A weak rupee substantially reduces the effective returns of FPIs in dollar terms and makes the Indian markets less attractive to FPIs. But, we shall dwell on this point in greater detail later.

How do the FPI flows look like in dollar terms?

The table below takes a look at the FPI flows (only into equity) i.e. secondary markets and IPOs. Debt flows have been ignored for the sake of simplicity.

Month	Dollar Flows in millions (Equity)
Oct-21	-1,807.38
Nov-21	-790.34
Dec-21	-2,524.78
Jan-22	-4,459.82
Feb-22	-4,742.25
Mar-22	-5,384.94
Apr-22	-2,236.23
May-22	-5,178.19
Jun-22	-6,436.60
Grand Total	-33,560.53

FPIs sold $33.56 billion of equities in the last 9 months. This dollar figure gives an idea of the pressure these flows impose on the rupee. Since the start of 2022, FPIs have sold $28.5 billion of equities; making it one of the worst bouts of FPI selling in the last 3 decades.

Going ahead, a lot will depend on the Indian Rupee

In the last few weeks, we have seen the rupee rapidly depreciate from the 75/$ levels to the 79/$ levels. With limited RBI support, the rupee looks set to breach the 80/$ mark. Since the start of 2022, the Indian indices are down 15% while the dollar has depreciated 7%, so the net dollar returns are -22% in 2022. With hawkishness, inflation, supply side constraints and geopolitical uncertainty taken for granted, the rupee will hold the key to FPI flows in future.

In the coming weeks, rupee will face pressure from a rising dollar index (DXY), widening trade deficit and consequent dollar demand from oil companies. In addition, the narrowing forward premium is making it unviable for traders to build rupee positions. FPI flows in the coming weeks will be all about the dance of the Rupee.

The total FPI inflow of $634 million would look paltry in comparison to the $35 billion of equities that FPIs have sold since October 2021. However, it gives hope that the trend of persistent FPI selling may have been finally reversed. Of course, we need to wait for more confirmation from FPI flows in the next few months. The impact of the market rally was also visible in the Assets under Custody (AUC) of the FPIs. It had fallen from $667 billion in October 2021 to $523 billion at the end of June 2022. In July it picked up to $569 billion. It is still way below the peak but the bounce amidst such challenging global conditions is surely a feel-good factor.

To understand the extent of the shift, look at FPI flows since the start of 2022. In January 2022, FPIs sold $4.46 billion of equities and $4.71 billion in February 2022. In March 2022, FPIs sold $5.38 billion, while April 2022 saw subdued FPI selling at $2.36 billion. However, net FPI selling in equities surged to $5.16 billion in May 2022 and $6.39 billion in June 2022. In comparison, July 2022 inflows of $634 million, albeit small, comes as a whiff of fresh air.

July 2022 was again an IPO drought. FPIs sold $0.930 billion in first half and bought equities worth $1.564 billion in the second half of June 2022. Here is the AUC standing, sector-wise.

Industry Group	Assets Under Custody (AUC) of FPIs - $ Billion (July 2022)
Financials	181.64
Oil & Gas	67.65
IT Services	65.88
FMCG	38.25
Automobiles	31.09
Power	28.17
Healthcare and Pharma	26.26
Consumer Durables	21.12
Metals & Mining	16.88
Telecom	13.58
Capital Goods	13.22
Consumer Services	12.98
Chemicals	12.49
Top 13 Sectors	529.21
Other 10 sectors	40.22
Total FPI AUC	569.43

Data Source: NSDL

Quick look at the AUC mix in July 2022

The table above captures the top 13 sectors with AUC more than $10 billion. NSDL has modulated the list from 40 sectors to 23 sectors. Out of these 23 sectors that FPIs invest in, AUC of the top-13 sectors accounted for 92.94% of total FPI AUC of $569.43 billion. The July 2022 AUC at $569.43 billion is up +8.8% over the June 2022 AUC. However, since the peak of October 2021, the FPI AUC is down -14.6%.

How does the sector mix of AUC stack up? Financials, comprising banks, NBFCs and insurance accounted for 31.9% of overall FPI AUC, which corresponds to the approximate Nifty weight too. The other significant AUC contributors were Oil & Gas $67.65 billion, Information Technology $65.88 billion, FMCG $38.25 billion, Automobiles $31.09 billion, Power $28.17 billion, Healthcare $26.26 billion and Consumer durables $21.12 billion. AUC gains were across the board with FMCG gaining the most in percentage terms. However, it must be remembered that this AUC spike in July 2022 is largely on account of the spike in the stock market indices and a sharp rally across stocks.

Finally, there was some good news in July 2022. The trend of FPI selling which started in October 2021 got nixed (hopefully) after nine persistent months of selling; when FPIs took out $35 billion from Indian markets. Despite this bounce in July, FPI holdings in Indian stocks are still $98 billion below the peak AUC that FPIs touched in October 2021.

FPIs and the sectoral buying story of July 2022



Data Source: NSDL

FPIs bought $634 million in Indian equities in July 2022. It must be noted that FPIs were net sellers in the first half of July with the sentiments turning around only in the second half. Out of the 23 sectors where FPI flows are tracked by NSDL, FPIs were net sellers in 7 sectors in June 2022,neutral on 3 sectors and buyers in the rest of the sectors. Like in June 2022, the IPO market was quiescent even in July 2022 with not a single IPO hitting the market. Clearly, the post-listing experience of LIC has left the IPO issuers with a lot to chew over.

The buying was strongest in telecom at $576 million and FMCG at $537 million. Telecom did attract a lot of buying interest ahead of the 5G auctions while FMCG companies had hinted at solid top line growth despite pressure on operating margins. Rural sales also surprised positively in the quarter. On the positive side, capital goods saw buying of $241 million and power sector of $204 million. While power buying was more a renewable bet, capital goods may be the first signs of the capital cycle turning around. There were smaller chunks of buying in financials, construction, cement and the automobile sectors too.

Selling by FPIs was much narrower in July 2022

For a change, the selling was a lot more muted in July 2022, although there were sectors that saw net selling by the FPIs. The oil and gas sector saw net selling of $661 million. This was actually concentrated in a short span of a few days after the windfall tax was introduced on exports of petrol and diesel as well as oil extracted in India. This led to aggressive selling in stocks like Reliance and ONGC, where the upstream pressure was the most. Another sector that saw aggressive selling was IT at $585 million. This was in the immediate aftermath of the results announcement. Most IT stocks saw aggressive selling as the quarterly numbers showed weak guidance and attrition pressure on operating margins.

Apart from IT and hydrocarbons; the other 2 sectors that saw selling to a lesser extent were metals and chemicals. This was more on concerns over a forced slowdown in China as it targeted a zero COVID policy, leading to a spate of business shutdowns in key cities.

FPI flows into IPOs and secondary markets in calendar 2022

Calendar Year 2021	FPI Flows - Secondary Markets	FPI Flows - IPOs	Overall FPI Flows	Cumulative FPI Flows
Year 2021	-7,070.50	+10,830.64	+3,760.14	+3,760.14
January 2022	-4,437.78	-22.04	-4,459.82	-4,459.82
February 2022	-5,144.48	+402.23	-4,742.25	-9,202.07
March 2022	-5,244.75	-140.19	-5384.94	-14,587.01
April 2022	-2,180.02	-56.21	-2,236.23	-16,823.24
May 2022	-5,860.97	+682.78	-5,178.19	-22,001.43
June 2022	-6,429.51	-7.09	-6,436.60	-28,438.03
July 2022	-4.58	+622.63	+618.05	-27,819.98

Data Source: NSDL (all figures in $ million)

If you look at the cumulative FPI flows for calendar 2022 till July, the net outflows of $27.82 billion is still intimidating. However, the positive takeaway is that July 2022 has been the first positive month for FPI flows into equities after 9 months of selling. The positive takeaway is that August has also begun on a positive note and we may get a positive picture once the IPOs get back to regular stream.

One factor that could drive positive flows by FPIs is the rupee bottoming around Rs80/$. That could incentivize FPI flows in terms of dollar adjusted returns. For that, the focus of the FPIs would be rivetted on the current account deficit.