FPI outflows in year 2022 were the highest in history
Foreign investors sold with Indian equities with a vengeance in 2022 and that was visible in the numbers. For instance, in the year 2022 so far, Foreign portfolio investors (FPIs) pulled out a total sum of Rs. 134,000 crore. This is a stark contrast to the actions of FPIs in the last 3 years. For instance, as per depository data, FPIs infused Rs. 50,089 crore net in 2021, Rs. 103,000 crore net in 2020 and Rs. 135,000 crore net in the year 2019. The last time that India saw such huge outflows was in the year 2018 when we saw withdrawals of Rs80,419 crore. Year 2017 had seen record inflows of Rs. 2 trillion into Indian equities, a figure that has not been seen in any of the earlier years in terms of FPI flows into India.
The sharp outflow during the year 2022 were an outcome of several factors. There were a series of Fed rate hikes, RBI hawkishness, rampant inflation, rising input costs, rising cost of funds for corporates, falling profits, supply chain constraints by China and the ongoing war situation in Russia and Ukraine. Just to give a sampler, the US Federal Reserve has already hiked the Fed rates by 425 bps since March of this year. Even the RBI MPF is not too far behind. It has hiked rates by a full 225 points since May and even the latest RBI policy has spoken extensively about being hawkish till inflation came down meaningfully. In 2022, the withdrawals by FPIs were not only in equity but also in debt, albeit much smaller.
Let us look at the actual numbers. For 2022 so far, FPIs have withdrawn Rs1.21 trillion from the stock markets and Rs16,682 crore from debt market, including the VRR withdrawals. Debt outflows were part of the global risk off flows, but were exacerbated after the government of India did not take the initiative to push for inclusion of Indian debt in global bond indices. FPI outflows from India were part of the plan to go light on EMs. For instance, FPIs started pulling out after inflation went up sharply globally, and central banks across began hiking rates. The Russian invasion of Ukraine also accentuated the FPI withdrawals with the global economic slowdown making inflows all the more challenging.
The situation in 2023 is not clear, but FPIs may now take some time to come back. For example, FPIs have already turned cautious in recent days due to the rise in COVID cases and concerns over the situation in China. The latest US Fed statement has also hinted at continuation of the Fed’s hawkish stance at least till the middle of 2023. This is likely to push bond yields up and equities down and also trigger selling in EM assets. FPI flows are likely to be restrained, given pressured risk appetite in CY23. However, the redeeming feature could be domestic DII flows, which touched a record $40 billion in year 2022.
What exactly is driving the DII flows into India. Of the major contributors to DII flows, it is estimated that close to $12 billion would come from insurance companies while another $8 billion would come from the EPFO. . In addition, the Systematic Investment Plans (SIPs) of $20 billion per year will also give support to Indian stocks. These 3 categories of domestic investors would account for most of the DFI flows into the stock markets. Ironically, the FPI investors had net sold $34 billion of Indian equities from October 2021 to June 2022 and that could not really dent the Indian markets more than 10% as the domestic investors stood up strong. That is a new angle to flows into Indian markets.
What is also interesting is that despite the heavy selling, India’s weight remained unchanged. What is more gratifying is that now the domestic investment institutions (DIIs) own more than 15% of the BSE-500 shares, which is just about 330 basis points short of what the FPIs own in Indian stocks. Clearly, the fact is that the FPIs are selling and may remain net sellers in Indian equities for some more time. By then the FOMO (fear of missing out) factor is likely to bring the FPIs back into India. For now, it is the DIIs who are actually calling the shots on Indian equities.
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