FPIs infuse nearly $4 billion into Indian equities in November 2022

It almost looks like the foreign portfolio investors (FPIs) are back with a bang in the Indian markets. With about 3 days to go for the month of November to conclude, the FPIs have already infused $3.86 billion into Indian equities. This is the best month since August 2022, when the FPIs had infused $6.44 billion into India.

Remember. For Calendar 2022, FPIs are net sellers since they had withdrawn close to $34 billion from Indian equities between October 2021 and June 2022. Is the month of November, finally, the light at the end of the FPI tunnel? Or is it just a blip before FPI start selling again? Check the table below.

Data Source: NSDL

As can be seen in the above table, FPIs were aggressive buyers in the first 15 trading sessions of the month. The next few days have been neutral but as of the end of 25th November, the cumulative inflows from FPIs is still at the highest point for the month and that is the good news. Whether this is a blip or the light at the end of the tunnel; is something that should manifest over the next few months. However, the narrative is gradually shifting in favour of FPIs making a comeback into Indian equities. Here is why.

Why FPIs may again make a beeline for Indian equities?

There are several potent reasons why the FPIs may still make a beeline for Indian equities. Let us enumerate about five such key justifications.

1. The global hawkishness tendencies of central banks may not yet be over. However, the minutes of the Fed have underlined that at these levels, the road ahead would be more measured rather than aggressive in terms of rate hikes. Clearly, rates in the US are also 150 bps above the neutral rate of 2.50%. That means the pressure on growth and inflation should start sooner than later. This subdued tone of the Fed may even give the RBI the leeway to be less hawkish in December, or perhaps in early 2023. That is favouring FPI flows.
    

2. Rate differentials between India and the US were a major issue. At one point the Fed was a lot more hawkish than the RBI, raising concerns that the narrowing rate differential may encourage risk-off flows out of EMs like India. However, the assumption was that US inflation would come down rapidly, which has not been the case. As of now, 10-year bond yields in India are giving real returns of 1% while in the US the real returns on 10 year bonds is -3.8%. That will ensure that FPI flows may still favour India.
    

3. Oil prices have come as a blessing in disguise for India. Most FPIs had been worried that a spike in oil prices above $100/bbl would put pressure on India’s trade deficit and its current account deficit (CAD). Oil has come downs sharply; partly due to unrest in China and partly due to more reasonable price caps likely to be imposed by the EU on Russia. With an 85% dependence on imported crude, the dividends of lower oil prices are huge for India. That also means, inflation could taper to more acceptable levels.
    

4. The combination of healthy FPI flows and lower oil prices means that the pressure on the Indian rupee should top out, sooner rather than later. The INR has already bounced back from 83/$ levels to around the 81.50/$ levels. FPIs are seeing an opportunity here. A healthy strengthening of the rupee would allow the FPIs to make a double barrel profit; on the stock price appreciation and also on the rupee appreciation. That is what is possibly exciting the FPIs.
    

5. Lastly, FPIs are seeing the bigger picture on the corporate and macro performance and Q2GDP numbers may be the first indicator. FY23 GDP is expected to grow at over 7%, making India the fastest growing large economy with a 400 bps advantage over China on GDP growth. Secondly, banking numbers have been impressive in the second quarter, which is normally a good lead indicator. Lastly, from a fundamental perspective, FPIs are betting on outsourcing and PLI being a game changer for Indian economy.

Clearly, it appears to be a case of nobody wanting to miss out on an economy that is poised to transition from being a $3.4 trillion economy to a $5 trillion economy in the next 5 years. OF course, as IPO flows pick up, the FPI numbers would look a lot more impressive. FPIs are not going to let this opportunity go away so easily.