FPIs turn positive in the first three weeks of July

That almost sounds out of sync with the times, but yes the foreign portfolio investors are net sellers in the month of July till date. For the month of July till 22nd, the total net inflow from FPIs was Rs1,099 crore in equities. But that still does not tell you the full story. Between 01st July and 15th July, the foreign investors actually saw equity market outflows of Rs7,432 crore. But the tide really turned as the FPIs aggressively bought equities worth Rs8,531 crore between 18th July and 22nd July, resulting in net inflows in August 2022.

This may not be too significant, nor may be too representative or even indicative of the emerging trend. But the reason it is important is that it comes after more than 9 months of persistent FPI selling. FPIs have net sold nearly $35 billion since October 2021 and close to $29 billion in the current calendar year 2022 itself. In comparison, the week from 18th of July to 22nd of July was perhaps one of the most fruitful for the equity markets with strong buying from the global investors, although it could be triggered by rupee arbitrage. 

Some of the numbers are quite staggering in terms of FPI outflows till the close of June 2022. For instance, FPIs pulled Rs50,203 crore from the equities market in the month of June 2022 alone. For the April to June quarter, FPIs were net sellers to the tune of Rs107,340 crore in Indian equities. For the first half of 2022, ended June 2022, the foreign portfolio investors were net sellers to the tune of Rs217,358 crore. Actually, the secondary market selling was much sharper, but was offset by FPI flows into select IPO.

It is too early to say if the trend has changed and fresh winds are blowing in the market. However, the good news is that the relentless selling has come to halt, or that is what it appears like now. Interestingly, the maximum buying is coming into the financial space. In the last 9 months, it was financials and IT that also saw the maximum selling by the FPIs, since their exposure to these sectors was also the highest. Also, IT has had some serious question over the sustenance of its operating margins and high levels of attrition.

Going ahead, some key factors may be instrumental in deciding the direction of FPI flows into Indian equities…

a) The big factor will be the US FOMC outcome late on 27th of July. The market is betting between a 75 bps rate hike and a 100 bps rate hike. The CME Fedwatch is indicating at a likely 75 bps rate hike. However, if the Fed opts for 100 bps then the dollar would strengthen and we could see a lot of safe haven money rushing out of India into relatively safer dollar assets. That is one risk to FPI flows.

b) The second risk is the current account deficit levels, which his expected to cross 5% of GDP in this year. That is not looked at too favourably by the foreign investors. Normally a combination of high current account deficit and high fiscal deficit makes FPIs wary of investing in any macro market. That could again trigger FPI outflows from India.

c) Finally, the first quarter results could also hold the key to FPI flows. Valuations are looking historically reasonable, but the big assumption is that profits don’t take a hit. Input cost inflation has been a major villain of the piece and that is the reason why many companies have disappointed on profits despite robust sales. That could be a dampener.

To sum it up, the trends in July till date are good and if the IPO market revives, it could be icing on the cake. However, the risks are not too far away for the time being.