After big bang August, FPI flows were a whimper in September

3 Oct 2022 , 05:05 AM

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.