Why FPIs infused $37 billion into Indian equities in FY21?

Why did FPIs bet so heavily on Indian equities as it was just about trying to emerge from the lag effect of the pandemic-driven lockdown.

April 07, 2021 10:28 IST | India Infoline News Service
Why would global investors infuse $37 billion into Indian equities in a year when it was well known that Indian would report negative GDP growth? Why did FPIs bet so heavily on Indian equities as it was just about trying to emerge from the lag effect of the pandemic-driven lockdown. Here is a quick look at the FPI flows chart in FY21.

Data Source: NSDL
Before we look at the full year flows, it needs to be remembered that in the month of March 2020, just before FY21 began, FPIs had withdrawn a total of $16.50 billion from equity and debt combined, the biggest single month withdrawal in history. The FPI flows into equities in FY21 are the highest single-year flows by a margin. The only other two occasions since the global financial crisis when we saw over $20 billion infusion into equities were $24.29 billion in FY11 and $25.83 billion in FY13.

How equity and debt flows in FY21 compare with previous years?

It is quite clear that the FPI flows in FY21 were the biggest by a margin at $37 billion. However, to get a clearer picture, you need to go back and look at the FPI flows into equity and debt combined over the last 11 years. That will help put things in much better perspective in terms of FPI flows.

Fiscal Equity ($ billion) Debt ($ billion) Total Flows ($ billion
FY2010-11         24.293 7.931 32.224
FY2011-12 9.013 9.910 18.923
FY2012-13 25.831 5.213 31.044
FY2013-14 13.442 -4.565 8.877
FY2014-15 18.370 27.327 45.697
FY2015-16 -2.008 -0.514 -2.522
FY2016-17 8.464 -0.867 7.597
FY2017-18 3.960 18.505 22.465
FY2018-19 0.122 -6.128 -6.006
FY2019-20 1.291 -4.660 -3.369
FY2020-21 37.029 -2.221 34.808
Data Source: NSDL (Debt includes VRR debt since FY19)

There are a couple of interesting data points here. For example, while FY21 was the best year in terms of FPI flows into equities  at $37.03 billion, FY15 remains the year that saw record overall FPI flows of $45.7 billion. Expectations of major economic reforms from the Modi government and the opening up of debt market for FPIs in a bigger way led to record flows in FY15. If you look at overall FPI flows, then FY11 and FY13 are not too far behind FY21. But the bigger question that we look at is what triggered this massive FPI flow into Indian equities in FY21?

What triggered these FPI flows in FY21?

There were a number of reasons that triggered this $37 billion FPI flow into India in the previous fiscal year.

a) It must be said to the credit of the government that its reaction to the COVID pandemic was swift and decisive. Not only in terms of announcing the lockdown, but it also showed alacrity in announcing 125 bps rate cut and an overall fiscal-cum-monetary package of $400 billion. That is something FPIs certainly appreciated.

b) Global liquidity was a factor and a good chunk of the $10 trillion of liquidity infused by global central banks found its way into risky assets, including EM equities. With the kind of liquidity sloshing around, valuations and profits really did not seem to matter. Hopes that India would grow fastest among G-20 nations in FY22 also helped.

c) An important policy shift was to treat the overall sectoral cap for various industry groups as the FPI cap limit too. This offered sufficient legroom for FPIs to expand their exposure to various frontline stocks. This also effectively led to major index providers like MSCI raising India’s weightage in the EM indices. This attracted a good deal of passive flows.

d) Finally, there were some procedural changes that also helped in terms of easing investment rules for FPIs. The implementation of the Common Application Form or CAF was a major boost to simplification of FPI onboarding. This CAF could be used for registration with SEBI, PAN application as well as opening bank and demat accounts.

FY22 may be a lot more challenging

If you look back at the last 11 years, there have not been 2 successive years of bumper FPI flows into equities. Also, the total ownership of FPIs in Indian companies stands at over 24%, the second highest shareholder category after the promoters. The resurgence of COVID in the current fiscal may dent the short term FPI flows into India and a lot would depend on how quickly, Indian expands its inoculation drive and brings the COVID resurgence under control. Till that happens, it will continue to be a major event risk for the FPIs.

FPIs admit that most Asian markets offer stocks at much better valuations than India. However, the risk is that they are either too commodity driven or too US dependent or too China dependent. India is perhaps one economy that offers the advantage of a huge captive domestic market. Till that advantage exists, Indian markets may continue to entice FPIs.

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