Longest spell of FPI selling and still no end to it

2 Jul 2022 , 08:27 AM

Indian markets are creating history of a different sort, and not too encouraging. The month of June 2022 marks the ninth successive month of net selling by foreign portfolio investors (FPIs). This is not only the longest spell of FPI selling in terms of the length but also in the intensity of the selling. But, we will come back to that point later.

During the last few months, it is hard to even recollect the number of days that FPIs were net buyers. Even at the peak of the COVID sell-off, the bounce from the lows of March 2020 was led by a sharp revival in FPI buying. However, since October 2021, there has been no respite in FPI selling. Forget about any bounce, the selling has just intensified.

A saga of 9 months of persistent FPI selling

The table below captures the monthly FPI flows since October 2021 with a break up of equity and debt flows. The equity flows includes net 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
Grand Total	-2,55,879.18	-17,473.57	-2,73,352.75

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

Here are some key takeaways from table above.

• Over the last 9 months, total FPI selling has been to the tune of Rs273,353 crore or approximately $34 billion. That is one of the worst bouts of FPI selling seen in India.
• The secondary equity market selling was actually much higher during this 9-month period. Had it not been for IPO inflows, the numbers would have been a lot worse.
• Another feature is the building intensity. The month of June 2022, after the selling, marks the steepest selling by FPIs in equities and also in equity and debt combined.
• In the month of June 2022, the FPI flows into debt were negative due to the uncertainty over the trajectory of the RBI, giving rise to worries over real interest differentials.

The overall selling of Rs2.73 trillion in equity and debt combined marks the worst bout of FPI selling ever seen and even beats the selling seen around the COVID pandemic, the rupee panic of 2013 or the Global Financial Crisis of 2008.

Five reasons FPIs again sold off in June 2022

Normally, the aggressive selling by FPIs is never the outcome of any one factor but the confluence of several factors. Here are some interesting factors why the selling has been so intense.

1. Fed hawkishness has been one of the primary driving forces. The Fed had guided for over 300 bps of rate hike in 2022 and to its credit it has already delivered 175 bps. In short, the Fed is walking the talk. In the case of RBI, analysts believe that the Indian central bank may not go much beyond reversing the largesse of 110 bps during COVID and 90 bps out of that is already done. Hence the rate gap should only widen for the US bonds making them more attractive.
2. Inflation is another major factor in this equation. Let us understand why this factor is so important. India’s growth at 7.2% for FY23 is pegged to be the highest among the large economies with real GDP of over $1 trillion. But there is a small problem here. Most of the growth will be eaten away by persistent high inflation. Firstly, Indian inflation is not likely to come down in a hurry and secondly, the overt impact of imported inflation will continue to be pronounced on the Indian economy.
3. Thirdly, FPIs are becoming justifiably risk-off about most emerging markets. The contention of these FPIs is that as global yields rise, the impact of the borrowings will starting pinching emerging market governments. That is true of India, where the government has a massive of domestic borrowing program of Rs14 trillion in this year. That is something that is putting off the FPIs.
4. Fourthly, many FPIs are concerned that traditional valuation metrics like DCF and P/E ratio need a total rethink since the median cost of capital would have gone up sharply. That would mean discounting future cash flows at higher hurdle rates, leading to lower current valuations. This applies to all economies; just that emerging markets like India would be a lot more vulnerable to this adjustment.
5. Finally, there is the rupee factor and in the last few weeks, it is the weakness in the rupee that has been driving the FPI selling. A weak rupee substantially reduces the effective returns of FPIs in dollar terms and makes the Indian markets less attractive to FPIs. But, we shall dwell on this point in greater detail later.

How do the FPI flows look like in dollar terms?

The table below takes a look at the FPI flows (only into equity) i.e. secondary markets and IPOs. Debt flows have been ignored for the sake of simplicity.

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
Grand Total	-33,560.53

FPIs sold $33.56 billion of equities in the last 9 months. This dollar figure gives an idea of the pressure these flows impose on the rupee. Since the start of 2022, FPIs have sold $28.5 billion of equities; making it one of the worst bouts of FPI selling in the last 3 decades.

Going ahead, a lot will depend on the Indian Rupee

In the last few weeks, we have seen the rupee rapidly depreciate from the 75/$ levels to the 79/$ levels. With limited RBI support, the rupee looks set to breach the 80/$ mark. Since the start of 2022, the Indian indices are down 15% while the dollar has depreciated 7%, so the net dollar returns are -22% in 2022. With hawkishness, inflation, supply side constraints and geopolitical uncertainty taken for granted, the rupee will hold the key to FPI flows in future.

In the coming weeks, rupee will face pressure from a rising dollar index (DXY), widening trade deficit and consequent dollar demand from oil companies. In addition, the narrowing forward premium is making it unviable for traders to build rupee positions. FPI flows in the coming weeks will be all about the dance of the Rupee.