After three straight years of inflows funds, foreign portfolio investors (FPIs) sold Indian equities worth ₹1.21 lakh crore in 2022, which is the highest-ever yearly outflow.
Before this, the highest recorded outflow was in 2008 amid the global financial crisis, when foreign investors sold Indian equities worth ₹53,000 crore.
This came on the back of aggressive rate hikes by central banks globally due to heightened inflation and recession fears. Along with monetary tightening, volatile crude, and rising commodity prices along with Russia and Ukraine conflict led to an exodus of foreign money in 2022.
During the year, 2 distinct trends were witnessed in regard to capital flows by FPIs. The first half saw aggressive selling with FPIs offloading Indian shares consecutively for the first 6 months of the year.
FPIs sold Indian equities worth ₹2.12 lakh crore in the first half of 2022. This trend began in October 2021 amid concerns regarding quantitative tightening by the US Federal Reserve and continued till June - when the US Fed hiked rates thrice.
However, the second half of the year witnessed some inflows by foreign investors. The first month of 2022 when FPIs bought Indian equities was July, with inflows at ₹4,989 crore. Then in August, FPIs bought Indian shares worth ₹51,204, the highest inflows in 2022.
While September (- ₹7,624 crore) and October (- ₹8 crore) also witnessed net outflows, FPIs again turned bullish on India in November ( ₹36,239 crore) and finally December ( ₹11,119 crore).
“FPI flows towards India and other emerging markets from July 2022 started to turn largely positive with bouts of moderate selling. The above behaviour could be again signalling that the aggressive rate hikes by the US Fed may be approaching its peak going ahead,” said brokerage house ICICI Securities, in a fund flow report.
According to experts, the reversal in the trend in the second half of the year came on the back of consolidation in commodity prices, decent earnings by India Inc, and positive growth commentary by the US Fed as well as the RBI. The turning point for the net flows in July was US Federal Reserve Chairman Jerome Powell's statement that currently the US is not in a recession helped improve sentiments and risk appetite globally.
Just in the second half of the year 2022, FPI bought net shares worth ₹95,919 crore.
Going ahead, experts believe that the quantum of FPI outflows might not be as large as that seen in the first half of 2022 as India's growth is relatively promising.
"The investors (domestic + foreign) proactively showcased faith in India’s long-term growth story; a faith that has only strengthened in the last 6 months. This can be manifested in the market structure shifting to domestic-oriented themes that are well-supported by the country’s strength as a domestic-consumption economy" said Axis Securities.
Meanwhile, in the debt market, FPIs continued their sell-off for the third straight year with a net outflow of ₹ ₹16,600 crore in 2022. They had made a net withdrawal of ₹10,359 crore in 2021 and of ₹1.05 lakh crore in 2020.
Overall, including equities as well as bonds, FPI outflows in 2022 stand at 1.32 lakh crore.
However, the massive selling by FPIs has been absorbed by domestic institutional investors (DIIs) including mutual funds and insurance companies.
In terms of sectors, since the trend reversed in July, the financials and consumer sectors have been most in demand. Financial Services have accounted for 26 percent of overall net inflows of ₹85,000 crore in July-November this year, due to improving credit demand.
However, IT stocks have been sold the most by FPIs this year amid recession fears.
Going ahead, FPIs are likely to remain net buyers in Indian equities but in a restrained manner.