Big bang buying seen from FPIs in August 2022

1 Sep 2022 , 06:55 AM

July net inflows from FPIs into Indian equities was positive but relatively tentative at $618 million. The August 2022 net inflows from FPIs rose 10-fold to $6.44 billion. This is all the more significant since FPIs had been net sellers for 9 consecutive months between October 2021 and June 2022. During the 9-month spell, FPIs took out nearly $33 billion from Indian equities with the sell-off sharpening since the start of calendar 2022. Whether this buying sustains remains to be seen, but the good news is that in August 2022, FPIs have been decisive net buyers in equity and also in debt.

The big FPI flow turnaround in August 2022

The table below captures monthly FPI flows since October 2021 with a break up of equity and debt flows. The equity flows includes secondary market and IPO flows too.

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
Grand Total	-1,99,685.97	-13,472.83	-2,13,158.80

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

If July 2022 was a sampler of FPI buying then August 2022 was over 10 times that figure. In fact, the total buying in the month of August 2022 was more than the total FPI outflow in the month of June 2022. Here are some key takeaways.

·         After 9 months of persistent selling, the tide had turned in July 2022 but the trend of FPIs turning risk-on once again was confirmed unambiguously only in August 2022.

·         In August, the FPIs not only infused over $6.44 billion into equities, but also brought in close to $800 million into Indian debt paper, largely an affirmation of faith in net yield spreads and on rupee strength.

·         It may be recollected that the FPI holdings in Indian equities had fallen from $675 billion to $530 billion. That did bounce back in July quite sharply and in the month of August the net holding of FPIs in Indian equities should have bounced further.

·         One of the key sentiment defining moments of the month was the rupee taking support around 80/$ levels.

While uncertainties over the global rates trajectory and commodity inflation are still rampant, what has changed is the perception of FPIs. They seem to be getting more risk-on in their approach to investing.

What triggered the massive FPI buying in August 2022?

One big change is that the FPIs are looking at emerging markets more favourably. India, which is likely to be the high growth story for 2022 and 2023, is an obvious choice for FPI investing. Here are key factors that triggered a shift in FPI sentiments in August 2022.

a)      The biggest reason for the FPI selling was not just Fed hawkishness but uncertainty about the terminal Fed rates. That is now largely settled with even the Fed confirming that they would be largely done with their rate hikes by end of 2022. That implies a terminal rate in the US of 3.75% to 4.00%. Correspondingly, even the RBI is likely to settle for a terminal repo rate of around 6.25% to 6.50%. That kind of clarity gives a lot more comfort to the FPIs since it can be factored into their calculations.

b)      Inflation may not have fallen a great deal but the trend is headed down. In the US, consumer inflation is down to 8.5% and Powell has affirmed at Jackson Hole that there would be no relenting till inflation touched 2%. In India, the CPI inflation may have fallen just over 100 bps but the WPI inflation is down close to 275 bps. More importantly, the inflation expectations have been managed by central banks very effectively. That gives confidence to the FPIs that real returns would eventually be protected.

c)      Risk-off investing looks good as a concept but there is a more practical side to it. Investors just cannot go on buying treasuries of developed economies at low rates or zero yields. That will hardly help fill the huge gap in pension liabilities of fund managers. Risk-on has to come back sooner rather than later.

d)      In a sense, the RBI has hit two birds with one stone on the currency front. It did allow the rupee to weaken and find its level. However, it has defended the Rs80/$ level quite strongly. That now gives confidence to the FPIs that a strong to stable rupee would be instrumental in protecting their dollar returns; favouring FPI flows.

Let us now look at what could be risks to the August FPI flow story.

FPI flows impressed in August 2022, but risks persist

The table below gives a more granular encapsulatoin of the daily flows into Indian equities in the month of August, both in rupee and dollar terms.

Date	Net equity flows (Rs cr)	Cumulative equity flows (Rs cr)	Net equity flows ($ Mn)	Cumulative equity flows ($ Mn)
01-Aug-22	1,470.17	1,470.17	185.11	185.11
02-Aug-22	5,346.90	6,817.07	675.38	860.49
03-Aug-22	1,662.52	8,479.59	211.49	1,071.98
04-Aug-22	3,967.58	12,447.17	503.23	1,575.21
05-Aug-22	1,728.12	14,175.29	217.26	1,792.47
08-Aug-22	1,999.91	16,175.20	252.79	2,045.26
10-Aug-22	1,573.51	17,748.71	197.73	2,242.99
11-Aug-22	2,454.99	20,203.70	308.80	2,551.79
12-Aug-22	2,248.85	22,452.55	282.92	2,834.71
17-Aug-22	14,263.35	36,715.90	1,789.60	4,624.31
18-Aug-22	4,308.13	41,024.03	542.35	5,166.66
19-Aug-22	3,457.21	44,481.24	433.96	5,600.62
22-Aug-22	1,532.00	46,013.24	192.09	5,792.71
23-Aug-22	-346.34	45,666.90	-43.36	5,749.35
24-Aug-22	1,057.65	46,724.55	132.39	5,881.74
25-Aug-22	168.05	46,892.60	21.06	5,902.80
26-Aug-22	2,361.17	49,253.77	295.63	6,198.43
29-Aug-22	-113.57	49,140.20	-14.21	6,184.22
30-Aug-22	2,064.22	51,204.42	257.73	6,441.95

Data Source: NSDL

What do we read from the table above. Barring a couple of days of marginal net selling in August, the FPIs have been decisively buying on
all the other days. That is evident from the $6.44 billion that was infused into Indian equities by FPIs in August 2022, nearly ten times the net inflows of July. But it is not going to be an easy game. Here are some key risks that still persist to FPI flows into Indian equities.

a)      As of now the assumption is that hawkishness will bring down inflation. The start is promising, but inflation may not fall hard due to the labour slack in the economy. This is true of the US and the Indian economies. That would impel the central banks to enhance their terminal rates. Since the neutral rate is already crossed, that could hit GDP growth.

b)      The second risk for India is the high current account deficit, which threatens to get closer to 4.5% to 5% of GDP in FY23. That never makes FPIs too comfortable and could turn sentiments quite rapidly.

For now it is, perhaps, time to celebrate the big FPI turnaround in August 2022!