Is this the worst bout of FPI selling that India has ever seen?

Foreign portfolio investors have been net sellers over the last few months. In the last five-and-half months since October 2021, FPIs have been net sellers each month. FPI selling bouts are nothing new. We have seen that in the past, but it does intuitively look like this one of the worst bouts of FPI selling that India has ever seen. Firstly, let us look at the actual FPI flow numbers since October 2021.

How FPIs have sold in the equity markets since Oct-21?

The table below captures the equity market selling by the foreign portfolio investors on a monthly basis.

Month	Secondary Market Flows #	IPO Flows #	Total Equity Flows #
Oct-21	-1931.62	124.24	-1807.38
Nov-21	-4535.99	3745.65	-790.34
Dec-21	-4333.13	1808.35	-2524.78
Jan-22	-4437.78	-22.04	-4459.82
Feb-22	-5144.48	402.23	-4742.25
Mar-22 $	-5397.96	3.67	-5394.29
Total	-25,781	6,062	-19,719

Data Source: NSDL (# - in $ million .and. $ - till 11-March)

In the above table, we have considered data from October 2021 to mid-March 2022. In this period, foreign portfolio investors (FPIs) sold $25.78 billion worth of equity in the secondary markets. However, in this period, net inflows from FPIs on account of IPO investments were to the tune of $6.06 billion resulting in overall net outflows of $19.72 billion in a little under 6 months. In a way, the IPOs saved the day, but with the IPO market now drying up, the pressures of FPI selling are becoming all the more obvious.

It is not just the quantum of selling, but the consistency of selling across the last six months. On an average, the monthly selling has been to the tune of $4.7 billion in secondary market equities, which was one of the reasons for the pressure on the indices. However, the only reason the markets have not cracked during this period was due to consistent inflows from domestic institutions and a surge in retail participation in Indian equity markets.

What triggered this massive sell-off in equities by FPIs?

The signs of FPI caution were visible from Jun-21 itself. However, the FPI selling momentum actually caught only from Oct-21. Here is why.

1. The bounce from the COVID lows was not only rapid but also stunning. In a short span of time, the valuations of the Sensex and Nifty had reached record levels. Since June last year, FPIs have been expressing concerns about the consistent fall in valuation cushion.
2. Input costs were badly impacted by WPI inflation. Supply chain constraints, like in most parts of the world, were hitting input costs in India too. The impact on operating profits has been visible in the last 2 quarters and is only likely to get worse.
3. Fed hawkishness was also an important factor. Normally, Fed hawkishness and the decision to wind down the bond book have been negative for flows into emerging markets. That created some serious doubts about rate hikes in India.
4. While the profits had bounced in the post-COVID period, most of the gains came from cost cuts, inventory efficiency and lower input costs. Due to supply chain constraints, the supply could not keep pace with the rapidly growing demand.
5. Finally, the Russia-Ukraine war became the proverbial last straw on the camel’s back. It raised oil prices close to the historic 2008 highs. US sanctions on Russia are supposed to make things worse. The FPI bearishness was just about stoked by the war situation.

How deep have FPI sell-offs been in the past?

To reiterate, this is not the first time that FPIs have sold off aggressively. If you look at the period from the Global Financial Crisis of 2008, there have been at least five occasions when FPIs aggressively sold off in Indian markets. Here is how.

Each of the above instances refer to a period of sustained selling by FPIs. Of course, $16 billion in 2008 would be much bigger if indexed to today’s value. In terms of global impact, nothing comes close to the global financial crisis of 2008 when scores of large banks and financial institutions were on the verge of collapse. The selling during the taper tantrum of 2013 had a deep impact on the rupee because the FPI selling in debt was almost three times the equity selling. Finally, the COVID FPI selling happened in the shortest span of time.

How exactly does the 2022 FPI selling compare?

In terms of overall quantum of FPI selling in equities, this is the biggest. Also, the numbers look a tad respectable due to the IPO inflows. Otherwise, the secondar market FPI selling in equities in the last five months has been substantially higher at $25.78 billion.

But the FPI selling in 2021-22 is significant for two more reasons. Firstly, this is the first time that a confluence of negative headwinds are threatening to derail FPI flows into India. There are macro concerns and also company level micro concerns. The second big reason is that the FPI selling has already been so aggressive without even the rate hikes and bond tapering starting. It would be interesting to see how FPIs flows will react to actual rate hikes.

The FPI sell-off in the last 5 months has been one of the most significant spells of FPI selling in the last 15 years. The real challenge is, it is not clear how much longer this bout of FPI selling would last!