FPIs withdraw $16.5 billion from Indian equities in 2022

What was the big FPI flow story of year 2022. It was almost like the tale of two halves. The first half of 2022 showed a lot of bearishness with FPIs thinking with their feet. On the other hand, the second half of 2022 showed a complete turnaround with FPIs turning net buyers. Just look at these numbers. Between the month of January 2022 and June 2022, FPIs were net sellers in equities to the tune of Rs. 2.17 trillion. However, between the months of July 2022 and December 2022, FPIs were net buyers in Indian equities to the tune of Rs. 0.96 trillion. Despite the valiant effort int the H2-2022, FPIs still ended 2022 with net equity selling of Rs1.21 trillion. However, this vastly better than where it stood in June 2022.

Month-wise net FPI flows into equity and debt in 2023

The table below captures the net flows into equity and the net flows into debt; both on a monthly basis and on a cumulative basis. The table is almost self-explicit.

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

A cursory glance at the numbers would quickly tell you how the numbers changed drastically in the second half of the month. While India still ended the year with net FPI selling, the buying in the second half substantially mitigated the impact of the FPI selling. Here is what we read from the FPI numbers for 2022.

• In H1-2022 i.e. between January 2022 and June 2022, Net FPI outflows from equities were to the tune of Rs. 2.17 trillion. There were several factors for his persistent selling. Inflation was rampant, central banks were using rates to fight inflation, negative yield curve was hinting at a likely recession and Indian companies were feeling the pain of falling OPMs and compressing interest coverage ratios. This resulted in risk-off approach by the FPIs towards emerging markets and India paid a price for that.
   

• However, it must be said that the second half of 2022 marked a sharp turnaround in FPI sentiments. After FPIs took out Rs. 2.17 trillion from equities in the first half, the second half saw infusion of Rs. 0.96 trillion. The net result was net outflows of Rs. 1.21 trillion in year 2021 or $16.5 billion. While most of the risks have persisted, the confidence emanated from India likely to still be the fastest growing large economy. That acted as a boost to sentiments of FPIs.
   

• In year 2022, the debt markets also saw net FPI selling to the tune of Rs. 12,122 crore with concerns over negative real rates, risk-off investing and non-inclusion of Indian debt paper in benchmark bond indices.

The good news that actually flattered the FPIs was that, despite persistent rate hikes, real GDP growth in India had shown positive traction.

Will the FPI selling continue in 2023?

It is hard to say at this juncture, but 4 factors could hold the key to how the FPIs behave in year 2023.

1. The focus will still be on Fed hawkishness in 2023. Based on what we know now, Fed could hike another 75 bps in the first half of 2023. Terminal rates could get closer to 5.25% levels, although we should get greater clarity once the FOMC minutes are published on 05th January 2023. Let us add here that passive flows from index funds and index ETFs could also get negatively impacted if the Fed chooses to wind down the balance sheet quicker than usual.
    

2. The Q3FY23 results will start from 10th January 2023, and that will answer key questions on whether the hawkishness and the anticipated slowdown has hit the top line. Another question is whether the rising input costs and rising cost of funds could hit the operating margins of Indian companies. Both factors could have a bearing on the FPI flows into India in the year 2023.

3. In a world obsessed with inflation control, we cannot but put inflation at the centre of any debate on markets. It remains to be seen if the RBI is in a position to bring consumer inflation in India closer to 4% median target. In the current context, inflation control remains the best way to boost real GDP growth since nominal GDP growth is going to be tough to come by. Commodity prices and rupee value will be key factors.
    

4. With the latest current account deficit for Q2 FY23 coming in at 4.4% of GDP, that is a risk that cannot be wished away. FPIs have been nervous as the CAD as a percentage of GDP scaled 4.4% and promises to remain sticky. Probably, a decisive and clear Budget 2023 can help matters. CAD will remain the big X-factor for FPI flows in 2023.