What is disappointing is that the FPIs were net buyers for the first 3 weeks of the month. However, after the Fed came out with its hawkish stance and the third consecutive hike of 75 bps, FPIs went into selling mode. FPIs rushed to safety, not just because of better risk adjusted returns, but also the fear that in a recession, the developed economies would be in a better position to hold out.

In August 2022, the FPIs had flattered with net inflows of $6.44 billion. In contrast, the net FPI outflows in September 2022 were of the order of $903 million, as sentiments turned sharply risk-off. It may be recollected and is also evident from the table below that FPIs had been net sellers for 9 consecutive months between October 2021 and June 2022. During that period, FPIs took out nearly $34 billion from Indian equities. While one month is too short to call a trend shift, it is clear that FPIs will be on the sell side as long as the Fed stays hawkish and the dollar remains exceptionally strong. That has been the case.

After the August big bang, comes the September whimper

The table below captures monthly FPI flows for the last 1 year between October 2021 and September 2022. The debt market inflows in the last 2 months can be attributed to hopes of bond index inclusion. Now, it looks like the index inclusion may not happen in the year 2022.

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
Jul-22	+4,988.79	-2,840.97	+2,147.82	-2,71,204.93
Aug-22	+51,204.42	+6,841.71	58,046.13	-2,13,158.80
Sep-22	-7,623.66	+2,556.67	-5,066.99	--2,18,225.79
Grand Total	-2,07,309.63	-10,916.16	-2,18,225.79

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

To say that September 2022 was a disappointment would be an understatement. The month actually saw a reversal of sentiments after the hopes of August.

·         The FPI were on the buy side for the first 3 weeks of September. It was only after the Fed persisted with its brutally hawkish stance that the FPIs decided to start selling. Tables turned quite sharply in the last few days of September.


·         A big factor in the entire fall was the sudden weakening of the rupee. It had hovered around 79.5/$ for a lengthy period of time. However, post the Fed hike, the rupee fell to almost 82/$. That also forced FPIs to sell aggressively.


·         The indications for Q2 results hint at top line pressure in most sectors, caused by weak domestic and global demand. This has also urged the FPIs to play cautiously.


For now, the guiding factor for FPIs would be the US Fed stance and the possibility of a full-fledged recession. Unfortunately, the Fed appears unrelenting on rates and the US Q2 GDP numbers reflect the second successive quarter of negative GDP growth.

Why FPIs turned net sellers in September 2022

The sentiments in September turned sharply in the second half after the Fed meet. Here are some key takeaways from the FPI action in the month.

a)      The Fed statement in September was a disappointment in a number of ways. Firstly, markets were expecting that the Fed would give some consideration to lower inflation and floundering growth. However, the Fed has almost been nonchalant. What is also disconcerting for the FPIs is that there is hardly any political pressure on the Fed. It almost looks like the Fed had been given a free hand. The single-point agenda of the Fed seems to be to control inflation, even at the cost of economic growth.


b)      The aggressive front ending of rate hikes has FPIs worried. After 2 hikes of 75 basis points each, the Fed was expected to sober down. However, it not only put through the third 75 bps hike, but also promised to sustain its hawkish stance. FPIs are worried that this kind of action may kill growth and lead to a point of no returns where even policy easing may not help revive growth.


c)      Of course, FPIs are also being wary due to the rising geopolitical risks. Russia continues to starve Europe of oil and gas and the war in Ukraine appears to be going on endlessly. Recession threatens the US, UK and EU, with China also struggling to grow.

How FPI flows panned out in September 2022?

The table below gives a granular encapsulation of the daily flows into Indian equities in the month of September 2022; both in rupee and dollar terms.

FPI Flow Date	FPI Flows (Rs Crore)	Cumulative flows (Rs Crore)	FPI Flow ($ billion)	Cumulative flow ($ billion)
01-Sep-22	4,259.67	4,259.67	534.34	534.34
02-Sep-22	-2,296.99	1,962.68	-289.31	245.03
05-Sep-22	-1,284.92	677.76	-161.04	83.99
06-Sep-22	263.62	941.38	33.00	116.99
07-Sep-22	1,704.81	2,646.19	213.40	330.39
08-Sep-22	111.05	2,757.24	13.89	344.28
09-Sep-22	2,836.17	5,593.41	355.99	700.27
12-Sep-22	2,274.84	7,868.25	285.66	985.93
13-Sep-22	1,696.40	9,564.65	212.91	1,198.84
14-Sep-22	4,573.71	14,138.36	578.48	1,777.32
15-Sep-22	-1,374.66	12,763.70	-172.73	1,604.59
16-Sep-22	-679.49	12,084.21	-85.38	1,519.21
19-Sep-22	-3,476.73	8,607.48	-435.58	1,083.63
20-Sep-22	732.25	9,339.73	91.92	1,175.55
21-Sep-22	1,804.05	11,143.78	226.42	1,401.97
22-Sep-22	-278.50	10,865.28	-34.85	1,367.12
23-Sep-22	-2,227.44	8,637.84	-275.93	1,091.19
26-Sep-22	-2,600.04	6,037.80	-321.32	769.87
27-Sep-22	-4,651.95	1,385.85	-570.26	199.61
28-Sep-22	-3,039.94	-1,654.09	-373.59	-173.98
29-Sep-22	-2,096.09	-3,750.18	-255.93	-429.91
30-Sep-22	-3,873.48	-7,623.66	-473.17	-903.08

Data Source: NSDL

The table clearly captures the turnaround in sentiments of FPIs from the third week onwards, after the Fed policy announcement. The selling has been absolutely aggressive in the last one week and that actually turned around the sentiments with FPIs selling about $2.3 billion of equities in the last 8 days of the month. That changed the monthly picture.

In our previous monthly analysis, while lauding the FPI inflows in August, we had highlighted two risks. The first was the risk of too much hawkishness by the Fed and the second was the risk of burgeoning current account deficit (CAD) in India. Both are turning out to be real risks in terms of FPI flows. If Fed policy is leading to a technical shift out of India, the rising current account deficit is leading to a fundamental shift of FPIs out of India.

Perhaps, August celebrations were premature, or probably September may be a freak case. The next few months will be critical for FPI flows into India.

After FPIs infused $6.44 billion in August, FPIs ended up being net sellers in September and flat in October 2022. Ironically, in both these months, the FPIs had been decisively net buyers in the first half before the tide turned in the second half of the month. Even in the month of November, the second half did not match up to the aggression of FPI flows in the first half. However, the FPIs still ended the month of November with net inflows of $4.45 billion into Indian equities. In November 2022, FPI infused $3.55 billion in the first half of the month and $900 million in the second half of the month.

It is essential to understand the backdrop to these FPI flows. Between the months of October 2021 and June 2022, the FPIs had withdrawn close to $34 billion from Indian equities. Things appeared to turn around with $634 million inflows in July followed by a whopping $6.44 billion inflow in August 2022. That was a welcome relief, but September and October were relatively disappointing. While FPI flows were negative in September, they were almost flat in October. In comparison, November 2022 has seen net FPI inflows to the tune of $4.45 billion.

How do Assets under custody (AUC) look sector-wise.

The assets under custody (AUC) is a function of the flows and also of stock market performance. With the flows erratic and markets volatile, the FPI AUC fell -21.6% from $667 billion in October 2021 to a level of $523 billion in June 2022. Subsequently, in July 2022, AUC picked up to $569 billion and then to $601 billion in August 2022. Over the next two months, weak markets and tepid flows again led to the AUC falling well below the $600 billion mark. The month of November 2022 has, however, seen the FPI AUC bounce back to $611.11 billion. However, it still remains about 8.4% below the peak levels, despite the Nifty and Sensex at new highs; indicating that the rally has been driven by domestic players.

Here is the AUC standing, sector-wise as of the close of November 2022.

Industry Group	Assets Under Custody (AUC) of FPIs - $ Billion (Nov 2022)
Financials	197.66
Oil & Gas	71.49
IT Services	65.53
FMCG	40.84
Automobiles	33.32
Healthcare and Pharma	29.63
Power	27.71
Consumer Durables	20.82
Metals & Mining	20.55
Telecom	16.34
Capital Goods	15.87
Consumer Services	14.55
Chemicals	12.93
Cement	10.40
Top 14 Sectors	577.62
Other 9 sectors	33.49
Total FPI AUC	611.11

Data Source: NSDL

The table above captures the top 14 sectors with AUC above $10 billion. NSDL has already modulated the list from 40 sectors to 23 sectors. Out of these 23 sectors that FPIs invested in, AUC of the top-14 sectors accounted for 94.52% of total FPI AUC of $611.11 billion. The November 2022 AUC at $611.11 billion is up +4.95% compared to the October 2022 AUC.

Financials, comprising banks, NBFCs and insurance accounted for 32.34% of overall FPI AUC, roughly corresponding to their weight in Nifty. The other significant AUC contributors were Oil & Gas $71.49 billion, Information Technology $65.53 billion, FMCG $40.84 billion, Automobiles $33.32 billion, Healthcare $29.63 billion, Power $27.71 billion and Consumer durables $20.82 billion. Thematically, financials, oil & gas and FMCG saw the maximum accretion in AUC numbers for November 2022.

FPIs flows in November 2022: Financials led the way

Data Source: NSDL

How were the FPI flows sector-wise in November 2022? It was a strongly positive month with $3.55 billion of buying in the first half of the month and $900 million of buying in the second half of the month. Out of the 23 sectors where FPI flows are tracked by NSDL, FPIs were net sellers in 6 sectors in November 2022 and buyers in 16 sectors.

The buying was strongest in Banking and Finance at $1,743 million followed by FMCG at $485 million, Information Technology $474 million and Automobiles $374 million. The strong flows into banking and finance was driven by robust Q2FY23 results for PSU banks, private banks and NBFCs. While FMCG witnessed defensive buying, it was the IT sector that saw a lot of value buying at lower levels. Other sectors that also witnessed significant net buying of $300 million or more included consumer services, oil & gas, capital goods and metals / mining sector. Even healthcare saw positive FPI flows in November 2022.

FPI Selling was very selective in November 2022

The FPI selling story of November 2022 was fairly limited to just 3 sectors. For instance, the consumer durables sector saw selling of $157 million as FPIs continue to be wary of stocks linked to consumer spending. These stocks have disappointed in recent weeks. Among others, Power saw selling of $135 million and Telecom saw selling of $133 million. The caution was more due to profits taking post the recent rally. Power stocks like NTPC and Tata Power as well as telecom stocks like Bharti Airtel have seen a sharp rally in recent months and some profit taking at higher levels is just about par for the course.

What is the overall story of November 2022. Early trends indicate that  indicate that FPIs are back on the buying side on the fervent hope that the pace of rate hikes by the Fed should slow and the RBI should follow suit. IPOs are finally looking up again and that gives some respite to flows.

FPI flows into IPOs and secondary markets in calendar 2022

Calendar Year 2021 and 2022	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
August 2022	+5,949.25	492.70	+6,441.95	-21,377.05
September 2022	-904.25	+1.17	-903.08	-22,280.13
October 2022	-99.30	+98.78	-0.52	-22,280.65
November 2022	+4,002.82	+422.84	+4,425.66	-17,854.99

Data Source: NSDL (all figures in $ million)

If you look at the cumulative FPI flows for the first 11 months of calendar 2022, the net outflows of $17.86 billion is still intimidating. However, it must be remembered that the 2022 FPI selling was at a peak of $28.44 billion as of the end of June 2022. The strong inflows in August and November have helped redeem the situation substantially. The real test would be if IPO flows also pick in the coming months. While Calendar 2022 may close with substantial FPI outflows, it looks like improving from 2023 onwards.

December 2022 is normally a neutral month for FPIs as they prefer to play it safe and avoid fresh allocations in December. Also, half of December is normally lost due to Christmas holidays and New Year celebrations. The positive flows in November 2022 indicate that finally risk-on investing is making a comeback among FPIs and that is good news. The macro trigger would be if the Fed sticks to slowing its rate hike momentum as that would be a morale booster for the markets. Till then, the India growth story should be salivating enough!