Nifty surges 18.9% in FY22, despite FPI selling of Rs.1.4 trillion

Let us start with the story that you all know. Foreign portfolio investors (FPIs) sold more than Rs.1.40 trillion in Indian equities in FY22. What is more, the entire selling happened in the second half and FPI flows were actually net positive at the end of Sep-21. But that is not the real story.

The real story was that despite such heavy selling by the FPIs, the Nifty ended the fiscal year FY22 with gains of 18.9%. First a look at the FPI selling.

How bad was the FPI selling in FY22?

Actually, the FPI selling was intense through FY22. Here is a quick picture.

1) Net FPI outflows at Rs.140,010 crore is just part of the story. The year saw FPI inflows into IPOs worth Rs.71,523 crore ($9.47 billion). However, secondary market outflows by FPIs were to the tune of Rs211,533cr ($28.01 billion). That was the skew.

2) The net FPI selling was the highest in 27 years in any single year. However, FPI flows were still positive as of Sep-21. The entire selling pressure started from Oct-21 onwards and most of the damage was done between Oct-21 and Mar-21. 

3) FPI flows into IPOs were robust but slowed down after the digital IPOs faltered. However, the real selling was visible in the secondary markets. The focus of selling was seen the most in sectors like banking, NBFCs and IT.

Let us quickly look at some of the key reasons why the FPIs sold so aggressively. 

1) Aggressive FPI selling was an outcome of Fed hawkishness. The US economy reported Feb-22 inflation at a 40-year high of 7.9%, opening the gates for a slew of rate hikes. 

2) Fed also planned to unwind its massive $9 trillion book after the monthly buying of $120 billion was wound up by March 2022. This could negatively impact passive ETF flows.
 

3) Cost inflation and rupee weakness was another major challenge as it resulted in a lot of imported inflation. Both factors were driven by supply chain shortfalls.

4) Last, but not the least, the FPI selling was triggered by the ongoing war between Russia and Ukraine as the geopolitical risk made risk-off selling in emerging markets rampant.

To sum up, it was a combination of the above four factors that triggered the FPI sell-off.

What explains the Nifty resilience under intense selling?

In regular market conditions, $18.5 billion of net FPI selling would have resulted in Nifty and Sensex falling almost vertically. In the years 2008 and 2013, the indices fell very sharply, despite much lower levels of FPI selling.

The irony was that FY22 was a positive year for the Nifty and the Sensex. In fact, in an year when the FPIs withdrew $18.5 billion, Nifty and Sensex rallied by a hefty 18.9%. There were several reasons for this anomaly.

While there was heavy selling in equity, FPI selling in debt was fairly limited. This avoided a major crash in the rupee, which normally triggers a chain reaction on the stock markets.

But the stock markets were also ably supported by the domestic institutions including the domestic mutual funds, LIC and other private insurance companies, apart from the indirect demand coming from the ETFs. Today, most domestic institutions have deep pockets.

Apart from the institutions, even the retail investors and HNIs have played a sterling role in boosting the markets. Indian markets have seen a surge in demat and trading accounts in the last 2 years as retail investors have taken a fancy for equities.

It is this combination of factors that contributed to the resilience of the markets. The reality is that FPI selling is losing its shock value for Indian markets and that is where India is really scoring.