For the first time in 4 years, FPIs turned net sellers in 2022. The year began with aggressive selling by the FPIs amidst quantitative tightening by the Fed. A whopping ~$30 bn was pulled out between January and June 2022. Net flows became positive in the second half, with an inflow of ~ $11.8 bn, but this was not enough to offset the negative flows experienced during the first half of the year.
Exhibit 1: Massive selloff in the first half followed by a slow recovery
NSDL; Data from January 2022 to December 2022
Continued net selling in 2023
The first three fortnights of the new year were marked by continued selling by FPIs as they treaded cautiously ahead of the budget. Although the budget turned out to be positive, it did little to boost investor confidence. While Nifty 50 took a nosedive post the release of the Hindenburg Report on Adani Group, FPI flows did not take a serious hit. In fact, the selling pressure subsided in the second half of January and continued to moderate in February.
Exhibit 2: Fortnightly Net Flows
NSDL; Data from January 2023 to February 2023
FPIs pulled out of sectors with high global linkages
Volatility in IT and Oil & Gas sectors continued amidst geopolitical tensions and global uncertainties. Consumer Durables sector, that is prone to global supply chain issues, saw continued selling. Rate hikes by the Fed led to outflows from Sovereign bonds too. These four sectors together accounted for ~45% of the total outflows between April 2022 and February 2023.
Exhibit 3: Net Flows between April 2022 and February 2023
Source-NSDL; Data from April 2022 to February 2023
FPIs betting on domestic- facing sectors
FPIs continued to be bullish on defensive sectors like Healthcare and FMCG. Capital Goods and Consumer Services sectors too saw net inflows. FPIs clearly are playing safe by investing in domestic-facing sectors that are relatively immune to global shocks.
Exhibit 4: Net Flows between April 2022 and February 2023
Source- NSDL; Data from April 2022 to February 2023
High fluctuations in Financial Services sector
It was a tale of two halves for the Financial Services sector. The first half of the year saw relentless selling by FPIs. The net flows became positive in the later half but the quantum remained low. The Hindenburg Report had a snowball effect on banking stocks which led to massive pull out by FPIs in January 2023. The Financial Services sector accounted for ~60% of the total outflows in January 2023. The high weightage to the Financial Services sector in the benchmark indices makes it the most susceptible to fluctuations in FPI flows.
Exhibit 5: High fluctuations in Financial Services sector
Source- NSDL; Data from April 2022 to February 2023
Growth in Assets Under Custody over the years
Despite the Indian market trading at premium valuation, the total Assets Under Custody (AUC) has witnessed a sustained growth since 2012. After crossing the $700 bn mark in 2021, the total Assets Under Custody (AUC) dropped to $634 bn in 2022. As of February 2023, it stood at $585 bn, down ~18% from the peak. Nervousness regarding the impact of rate hikes by central banks globally resulted in FPIs fleeing to safe haven assets.
Exhibit 6: Assets Under Custody since 2012
NSDL; Data from December 2012 to February 2023
Changing direction of FPI flows
India saw a huge inflow of FPI post the Covid correction in 2020. As recession loomed over Developed Markets, investors turned their attention towards India as an alternative investment destination to reduce their reliance on China.
2022 was a rough ride for markets around the globe. S&P 500 closed the year ~20% down y-o-y, marking Wall Street’s worst year since 2008. Indian markets, however, weathered these volatile conditions. While, all the major Emerging Markets closed the year in negative, Nifty 50 gained 4.3%.
Now that the Chinese market has reopened and other Emerging Markets, like Hong Kong and South Korea, have corrected significantly, FPIs have started directing flows to these countries where attractive valuations are available. Rate hikes in developed countries has led to further outflows.
The volatility in FPI flows is expected to continue in the upcoming months over concerns of a slowing global economy. What’s worth noting is the Indian market’s outperformance despite the extensive selloff by FPIs in 2022. While FPIs pulled out money from India, Domestic Institutional Investors (DIIs) acted as a stabilizing force in the market. Although the participation from foreign investors has been steadily increasing over the years, the dependence on them is not as high as it used to be which reflects the stability in the Indian market. The recent movement of FPI flows towards China has raised worries among investors. Although it may temporarily affect the inflows to India, its long-term impact is expected to be limited. With its robust economic fundamentals and increasing exposure in major indices, India is well-placed to attract its fair share of FPI investments.
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