Why FIIs sold $4.7 billion of Indian equity in 2023?

13 Feb 2023 , 06:05 AM

Since the start of 2023, there has almost been relentless selling from the foreign portfolio investors (FPIs). The net impact on the markets may not have been too deep, since the domestic investors like mutual funds and LIC have come to the rescue. But the bigger question that begs an answer is; what changed in 2023? FPIs had infused nearly $12 billion into Indian equities in the second half of calendar 2022, although it still ended the year with net outflows of $16 billion. However, the sell-off by FPIs in 2023 has been surprising.

The 2023 FPI flow story

As can be seen in the table below, the selling by the FPIs in January and February till date has been almost relentless. Before we get into the likely reasons for the FPI sell-off in 2023, here is a quick look at how the FPI flows have panned out in 2023 till date.

Trade  Date	Secondary Markets  (Rs cr)	Primary Markets  (Rs cr)	Net Flow  (Rs cr)	Cumulative   (Rs cr)	Net FPI flow  ($ million)	Cumulative   ($ million)
02-Jan-23	-3,567.40	7.35	-3,560.05	-3,560.05	-430.03	-430.03
03-Jan-23	1,664.14	-2.61	1,661.53	-1,898.52	201.08	-228.95
04-Jan-23	-341.22	84.94	-256.28	-2,154.80	-30.96	-259.91
05-Jan-23	-2,461.11	0.00	-2,461.11	-4,615.91	-296.86	-556.77
06-Jan-23	-1,255.94	-0.47	-1,256.41	-5,872.32	-151.93	-708.70
09-Jan-23	-2,774.87	98.81	-2,676.06	-8,548.38	-323.84	-1,032.54
10-Jan-23	41.21	16.20	57.41	-8,490.97	6.97	-1,025.57
11-Jan-23	-1,825.70	0.33	-1,825.37	-10,316.34	-222.04	-1,247.61
12-Jan-23	-3,401.99	-2.92	-3,404.91	-13,721.25	-416.75	-1,664.36
13-Jan-23	-1,344.88	-1.91	-1,346.79	-15,068.04	-164.80	-1,829.16
16-Jan-23	-3,739.90	0.41	-3,739.49	-18,807.53	-459.21	-2,288.37
17-Jan-23	1,584.62	-13.89	1,570.73	-17,236.80	193.03	-2,095.34
18-Jan-23	1,358.28	0.42	1,358.70	-15,878.10	166.15	-1,929.19
19-Jan-23	60.30	-5.71	54.59	-15,823.51	6.69	-1,922.50
20-Jan-23	579.26	8.64	587.90	-15,235.61	72.26	-1,850.24
23-Jan-23	-1,638.62	-2.13	-1,640.75	-16,876.36	-202.01	-2,052.25
24-Jan-23	226.07	-1.84	224.23	-16,652.13	27.59	-2,024.66
25-Jan-23	-116.08	1.80	-114.28	-16,766.41	-14.01	-2,038.67
27-Jan-23	-255.73	-0.77	-256.50	-17,022.91	-31.42	-2,070.09
30-Jan-23	-6,138.07	1.81	-6,136.26	-23,159.17	-752.51	-2,822.60
31-Jan-23	-5,695.69	2.84	-5,692.85	-28,852.02	-697.18	-3,519.78
01-Feb-23	-4,662.34	4.47	-4,657.87	-33,509.89	-569.85	-4,089.63
02-Feb-23	2,543.91	-1.28	2,542.63	-30,967.26	310.64	-3,778.99
03-Feb-23	-3,635.86	-1.83	-3,637.69	-34,604.95	-443.87	-4,222.86
06-Feb-23	-236.84	-13.07	-249.91	-34,854.86	-30.39	-4,253.25
07-Feb-23	-1,039.22	0.73	-1,038.49	-35,893.35	-125.95	-4,379.20
08-Feb-23	-2,209.37	2.55	-2,206.82	-38,100.17	-266.86	-4,646.06
09-Feb-23	-456.38	0.00	-456.38	-38,556.55	-55.20	-4,701.26
10-Feb-23	30.08	2.60	32.68	-38,523.87	3.95	-4,697.31

Data Source: NSDL

Here are some key takeaways from the FPI flows for the year 2023.

1. In calendar 2023, there have been 29 trading days so far. Out of these 29 trading days, the FPI net flows were positive on 9 days and negative in the remaining 20 days.

    

2. In the 29 trading days of January and February, FPIs were net sellers of Rs38,524 crore overall. Out of that, FPIs have sold Rs28,852 crore of Indian equities in January and the balance Rs9,672 crore of equities were sold in February 2022.

    

3. If you look at the January and February FPI flows in dollar terms, FPIs were net sellers of $4.70 billion overall. Out of that, FPIs sold $3.52 billion of Indian equities in January and the balance $1.18 billion of equities were sold in February 2022.

    

4. The FII action was largely dominated in the secondary market since the primary markets have not been too active with even the Adani Enterprises NFO being pulled out by the company after the completion of subscription.

Buy why have FPIs suddenly turned negative on Indian markets? There have been several reasons for the same.

FPI money is flowing to other EMs

In the last few weeks, a clear trend is emerging. It is not that FPIs are selling out of all EMs. There has been aggressive selling in India, but FPIs were net buyers in markets like China, Taiwan, Indonesia and South Korea. The reasons are not far to seek. Many of these Asian EMs are relatively undervalued compared to their historical PE averages. With China opting to end its zero-COVID policy, it is likely to put the Chinese economy on a growth trajectory. 

That will not only be positive for China but also for other Asian economies that are closely linked to the Chinese economy. Even countries like Indonesia, largely commodity driven, are likely to benefit from a revival in Chinese demand. For now, the FPIs are finding the short term risk-reward ratio more favourable in other Asian emerging market economies.

Hawkishness remains an overhang

Like it or not, the central banks across the developed markets remain hawkish. That is evident from the language of the US Fed, the ECB and also the Bank of England. Even though the US Fed has reduced the intensity of its rate hikes, it has ruled out rate cuts in 2023 and persisted with hawkish language, at least till inflation comes down to manageable levels. 

In a sense, even the RBI has stayed on the hawkish path, despite the cost of funds in India going up sharply. As long as hawkishness stays, FPIs are likely to be cautious about Indian markets. As of now, neither RBI nor the US Fed have given any firm commitment on the terminal rates of interest, where they plan to get done with hikes; or take a long pause.

Profit growth is largely from Financials

This is an important factor that has made FPIs cautious. If you look at the Q3FY23 and the Q2FY23 results, the common theme is that the growth trigger has come from banks and financials. There has been a strange story that has been favouring banks. The loan rates have gone up sharply and that improved the yield on advances. However, rates on deposits have not kept pace, resulting in higher net interest margins (NIMs).

Global investors are worried that this advantage may not sustain. Also, FPI exposure to financials is already near the weight of financials in the Nifty at around 34%. With only financials driving quarterly numbers growth for now, FPIs are left with very few sectoral choices. The other sectors are either hit by weak global demand, recession concerns, weak rural demand, higher cost of debt or high input costs.

It is the Sutton Principle at work for FPIs

Many years back, the Sutton Principle was formulated based on the notorious bank robber, Willie Sutton. When asked why he robbed banks, his answer was “Because that is where the money is. The Sutton Principle is about looking for obvious answers to problems rather than complicating by too much of deep thinking. That is now applicable to FPI selling in India too.

Shorn of all the jargon, the one reason why FPIs are selling in India is because that is where the profits are. In 2022, Nifty was the best performer among all global indices. In fact, Indian indices were among the handful of indices that gave positive returns in 2022. With that kind of a backdrop, the FPIs are selling India because that is where the profits are seen.

Adani group saga has been an overhang too

Finally, the one factor we cannot wish away is that the Adani saga has exposed several chinks in the India story. It was not about the allegations made by Hindenburg that would have perturbed the FPIs. They would have been more worried about the way the stock fell and how a handful for short sellers could allegedly use structured notes to shave off $100 billion from the market cap of one group. That is surely a scary thought for the FPIs!