Foreign portfolio investors have been on a selling spree in the Indian equity market since October 2021 primarily due to concerns over the quantitative tightening by the US Fed and the rich valuation of Indian equities and the situation is unlikely to change soon thanks to the soaring inflation led by higher crude oil and other commodity prices.
"Large-scale outflows from Indian equities by FPIs have been largely driven by the fear of aggressive quantitative tightening by the US central bank to tame inflation and relatively higher valuations of Indian equities," brokerage firm ICICI Securities pointed out.
However, the brokerage firm added that the valuations have rationalised significantly from Oct’21 levels and the fear of a structural increase in inflation is reducing as global commodity prices decline over the recent past which should build the confidence of slowing down FPI outflows incrementally.
But the risk still remains in terms of elevated CPI inflation and crude oil prices which are yet to climb down meaningfully from their recent peaks, said the brokerage firm.
ICICI Securities pointed out that the trailing 12-month (TTM) FPI selling eclipses outflows seen during the global financial crisis.
"The ongoing FPI selling in Indian equities is turning out to be the highest selling spree since the global financial crisis (GFC) of the calendar year 2008 (CY08) with TTM FPI cumulative selling in the secondary market of US$53bn versus US$28bn during the GFC, as per provisional flows data from exchanges," said ICICI Securities.
However, TTM net institutional outflows (FPI flows + DII flows), based on provisional data for secondary market flows are relatively lower at US$10.6bn compared to GFC peak outflow of US$8.6bn, supported by significant inflows from DIIs of US$42.5bn, said the brokerage firm.
Highlighting its impact on benchmark indices (Nifty50, Nifty Midcap), ICICI said the impact is much lower (15-25 percent drawdown) compared to GFC.
Using the final FPI flow data from NSDL, which includes primary inflows as well, net TTM outflow from FPIs is much less at US$32bn supported by record IPO-related inflows over the past one year. Consequently, aggregate FPI equity assets stood at ₹41.5trn as of 15th June 2022, which translates into 17 percent holding of aggregate listed Indian equities ( ₹245trn) and is a dip of 300bps from the Mar’21 level of 20 percent, said ICICI Securities.
Sectorally, the brokerage firm said, the bulk of the FPI selling on a 12-month rolling basis has been concentrated around financials and IT (93 percent contribution) along with FMCG, other services and construction materials whereas metals, power, discretionary consumption and telecom saw inflow.
Based on Mar’22 shareholding filings by listed companies, FPI holdings within the Nifty50, Nifty Next 50, Nifty Midcap and Nifty Smallcap indices have dipped 188bps, 155bps, 138bps and 113bps to 23.1 percent, 15.1 percent, 14.6 percent and 12 percent, respectively, ICICI Securities underscored.
The rise in SIP flows appears structural (monthly run-rate exceeding ₹110bn), which is also reflected in the tripling of mutual fund accounts from 40mn in Dec’14 to 129mn in Mar’22. FDI annual run-rate of around US$50bn as a source of financing CAD is absorbing the shock of FPI outflows, the brokerage firm said.
Disclaimer: The views and recommendations made above are those of the broking firm and not of MintGenie.
