In the first two months of January and February 2023, FPIs had sold Indian equities worth $4.21 billion as global cues came under pressure. The Adani sell-off saga also contributed to FPI selling. In contrast, the month of March 2023 saw FPI buying to the tune of $966 million. However, that may not be a very representative figure.

A large chunk of the FPI flows in March 2023 were largely accounted for by the $1.9 billion purchase of Adani group shares by GQG Investments. That flow came into India on 03rd March 2023. However, post 08th March 2023, when the SVB Bank collapsed and Signature followed, the FPIs have been predominantly on the sell side. To add to the concerns of the FPIs, one of the most reputed banks in Europe, Credit Suisse, was forced into a slump sale to UBS to ensure that the run on deposits would not result in the bank collapsing.

To understand the 2023 FPI flows, one must see FPI flows in perspective from October 2021. Between October 2021 and June 2022, FPIs net sold equities worth $34 billion. The FPIs did turn net buyers in the second half of 2022. In calendar year 2022, FPIs net sold $28 billion of equities in H1-2022 but turned net buyers of equities worth $12 billion in H2-2022. Overall, FPIs were net sellers of $16 billion in Indian equities in year 2022. Year 2023 began on a negative note, but the $966 million infusion by FPIs in March comes as a welcome relief.

March 2023: Equities see net buying, but debt sells off

The table captures monthly FPI flows into equity and debt for 2022 and 2023.

Calendar Month	FPI Flows Secondary	FPI Flows Primary	FPI Flows Equity	FPI Flows Debt/Hybrid	Overall FPI Flows
Full Year 2022	(146,048.38)	24,608.94	(121,439.44)	(11,375.78)	(132,815.22)
January 2023	(29,043.32)	191.30	(28,852.02)	2,308.27	(26,543.75)
February 2023	(5,583.16)	288.85	(5,294.31)	1,155.19	(4,139.12)
March 2023	7,109.65	825.98	7,935.63	-2,036.42	5,899.21
Total for 2023	(27,516.83)	1,306.13	(26,210.70)	1,427.04	(24,783.66)

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

After FPI selling of $4.21 billion in the first 2 months, March 2023 has seen FPI net buying of $966 million. That was largely on account of the GQG infusion into the Adani group stocks, in the absence of which, the FPIs would have been net sellers in March 2023 also. Here is a quick picture of the FPI macros in March 2023.

While the overall March figure may look skewed due to the GQG Investment into the Adani group, the sentiments continued to be negative. In the month of March, out of the 20 trading days, 10 days saw FPI selling and 10 days saw FPI buying on a net basis. However, post the banking crisis outbreak in the US and Europe, the FPIs have predominantly been on the sell side of the equity market.
The one big factor that has worried the FPIs is that the RBI has not been as aggressive as the Fed in hiking rates. One can argue that interest rates in India were not at near-zero levels. However, most FPIs argue that the outcome is visible since the US has had a better outcome in controlling the consumer inflation as compared to India.
In the December quarter, the overall numbers saw pressure on two fronts. Even as the commodity prices abated, most of the companies faced pressure from weak rural demand and tepid consumer spending. That has led to tepid growth in the top line. In addition, the 250 bps hike in the interest rates by the RBI has resulted in a sharp spike in the cost of funds, resulting in interest coverage going down. That has made FPIs slightly uncomfortable investing in India.
However, the big concern that FPIs have in the aftermath of the global banking crisis is the likely impact of the crisis on banking valuations. FPIs still have around 33% of their overall AUC (assets under custody) in banking and other financial stocks. The banking crisis is very likely to result in a lower revision of bank earnings and that is not good news for FPIs. It could trigger risk-off selling, if the situation worsens globally.

Year 2023 has begun on a dour note and even the net buying in March was skewed due to one single transaction. FPIs continue to be cautious and that is likely to keep FPI flows under pressure in the near future.

FPI equity flows in the month of March 2023

The table below gives a granular picture of daily flows into Indian equities in the month of March 2023; both in rupee and in dollar terms.

Report Date	FPI Flow (Rs Crore)	Cumulative Rs flows	FPI Flow ($ million)	Cumulative $ flow
01-Mar-23	-4,642.60	-4,642.60	-561.51	-561.51
02-Mar-23	840.93	-3,801.67	101.87	-459.64
03-Mar-23	12,741.05	8,939.38	1,543.33	1,083.69
06-Mar-23	236.84	9,176.22	28.79	1,112.48
08-Mar-23	866.04	10,042.26	105.94	1,218.42
09-Mar-23	3,950.96	13,993.22	481.31	1,699.73
10-Mar-23	-453.45	13,539.77	-55.35	1,644.38
13-Mar-23	-1,764.36	11,775.41	-215.13	1,429.25
14-Mar-23	3,008.62	14,784.03	367.29	1,796.54
15-Mar-23	-2,208.84	12,575.19	-268.19	1,528.35
16-Mar-23	-1,246.69	11,328.50	-151.12	1,377.23
17-Mar-23	166.70	11,495.20	20.16	1,397.39
20-Mar-23	-1,698.69	9,796.51	-205.98	1,191.41
21-Mar-23	-1,905.65	7,890.86	-230.98	960.43
23-Mar-23	-1,044.33	6,846.53	-126.31	834.12
24-Mar-23	386.49	7,233.02	47.04	881.16
27-Mar-23	-1,456.74	5,776.28	-177.14	704.02
28-Mar-23	-622.75	5,153.53	-75.62	628.40
29-Mar-23	1,946.85	7,100.38	236.83	865.23
31-Mar-23	835.25	7,935.63	101.41	966.64

Data Source: NSDL

There were 2 major events that determined the direction of FPI flows in the month of March 2023.

The first factor was Fed hawkishness. It was increasing becoming clear in March that the Fed and other central banks were unhappy with the way consumer inflation had responded to the series of interest rate hikes. This had led to a broad policy consensus that rate hikes would have to continue for much longer and also that the terminal rates would be much higher than originally envisaged. That had a dampening impact on FPI flows during the month of March.
He other big event was the banking crisis, as exemplified by the SVB and Signature Bank collapse in the US, the troubles at First Republican Bank and the slump sale of Credit Suisse to UBS in Europe. All these big events were indirectly a function of higher interest rates, although the core concerns were much larger. However, despite the central banks maintaining a brave face, it does look like they would tone down their hawkishness and their language to reflect a more gradual approach to interest rates. That is likely to be positive for FPI flows.

How do we perceive FPI sentiments in April 2023?

Most of the concerns that we saw in March at a global level and domestic level are still around. Not much is likely to change in a month; on the contrary more banks may unravel in the coming month. So, there will be pulls on FPI flows from both sides. As the central banks have maintained, the rate decision will be kept independent of the banking crisis. That is easier said than done. Currently, the crisis is still in its early stages. However, if the crisis was to deepen, this kind of de-coupled policy approach may not work.

The joker in the pack will be how China story manifests. A recovery in China would mean a revival in commodity prices and that is likely to once again direct FPI flows into emerging markets like India. We have to keep our fingers crossed for April flows.

Weekly Musings – FPI flows for week ended July 07, 2023

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