FPIs turn net buyers in July 2022, but just marginally

1 Aug 2022 , 07:36 AM

Till June 2022, it was almost like FPI selling would never end. Indian markets were literally creating history of a different sort, and not too encouraging. June 2022 had just marked the 9th successive month of net selling by foreign portfolio investors (FPIs); the longest spell in terms of length and intensity. In the midst of this heightened pessimism, the month of July 2022 came as a whiff of fresh air with buying from FPIs, although the buying was relatively tepid compared to the intensity of the selling in previous months.

The FPI selling started in October 2021 and that was also the time that the Nifty and the Sensex had touched their peak levels. Since October, FPIs sold Rs2.56 trillion in equities and Rs2.73 trillion overall, including debt. Selling was relentless in calendar 2022.

July 2022 FPI buying comes after 9 months of selling

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
Grand Total	-2,50,890.39	-20,314.54	-2,71,204.93

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

Against the mountain of selling in last 9 months, the July 2022 buying obviously looks paltry, but here are some key takeaways from the numbers.

• After 9 months of persistent selling, the tide finally turned with some marginal buying in equities, although the FPIs continued to remain sellers in debt in July 2022.
• Even in the month of July 2022, the secondary market flows were almost flat with most of the net equity inflows coming from the primary markets
• In the nine months between October 2021 and June 2022, the FPI selling was compounded by the market fall. FPI holdings are down from a peak level of $675 billion to $530 billion in Indian listed equities.
• While equities saw net buying in July, debt still saw selling with the pressure mounting as the rupee briefly threatened to go beyond the 80/$ mark.

It is said that a few swallows do not make a summer so just one month of buying by the FPIs cannot be indicative of a turn in sentiments. However, more than the data, it is the shift in the market perception and the changing macros that gives hope. There are several reasons for the FPI buying to sustain.

Why the FPI buying in equities could continue?

Technically, not much has changed between June and July except that there is a lot more optimism that the challenge of global inflation can be managed. That is likely to be a positive factor for FPI flows into EMs like India.

1. The biggest reason for the FPI selling was Fed hawkishness. The Fed continues to be hawkish in the sense that that they have already raised the Fed rates by 225 basis points between March and July 2022. Between June and July, rate hike has been 150 bps. The latest FOMC statement clarifies that Fed would be more receptive to a shift in policy if the growth impulses were impacted. This has given hope to the markets.
2. Inflation has not yet peaked but the slowdown in housing in the US is a clear signal that the rate hikes are starting to work. As of July, the Fed has touched a market neutral rate of 2.5% and above this rate, inflation normally starts to fall rapidly, even it be at the cost of economic growth. In India, the CPI inflation has fallen in response to rate hikes, but WPI inflation remains sticky. It is expected that even the RBI may go slow from here as the gains of a solid Kharif start to come in.
3. Risk-off investing is now expected to peak out. Even as global investors need safety, they also need returns. They need asset classes like Indian equities to boost the returns on global pension accounts. The latest IMF estimates have pegged India to grow at 7.4% in FY23. It is a signal that even amidst the global macro chaos, India would still be the fastest growing large economy in the world.
4. Lastly, much of the FPI concerns over fundamental valuations have been allayed by the aggressive fall in the Indian rupee. A 10-15% fall in the Nifty index combined with a 7% fall in the rupee, depletes FPI portfolios by over 22%. That puts Indian valuations on a much more attractive footing, especially in dollar adjusted terms.

FPI flows could predicate on how twin deficits is managed

Before we go into crystal ball gazing on the FPI flows, here is a quick summary of FPI flows into Indian equities in dollar terms.

Month	Dollar Flows in millions (Equity)
Oct-21	-1,807.38
Nov-21	-790.34
Dec-21	-2,524.78
Jan-22	-4,459.82
Feb-22	-4,742.25
Mar-22	-5,384.94
Apr-22	-2,236.23
May-22	-5,178.19
Jun-22	-6,436.60
Jul-22	+618.05
Grand Total	-32,942.48

Data Source: NSDL

Till June 2022, FPIs had sold $33.56 billion in equities since October 2021. With $618 million of FPI buying in equities in July 2022, the overall selling figure has marginally come down to $32.94 billion over last 10 months. Since the start of 2022, FPIs are net sellers to the tune of nearly $28 billion. The million dollar question is, what can lead to a surge in FPI flows in the coming months.

The rupee has played its role and it looks like it may stabilize around the 80/$ levels. RBI has been supporting the rupee at around that level. The bigger challenge to attract FPI flows would be how India manages its twin deficits; fiscal deficit and current account deficit. The fiscal deficit is pegged at 6.4% for FY23, but even the government has admitted it could spill over to 6.9% as it fiscally fights inflation. But more important would be the time table to reduce the fiscal deficit rapidly as a share of GDP.

FPIs normally tend to get wary of economies as the current account deficit crosses 3% of GDP. In FY23, it looks all set to get closer to 4-5% of GDP. That is too precarious to attract FPI flows and unless the CAD is checked, sustained FPI flows could be largely elusive!