After registering the steeping outflow of ₹28,852 crore in 7 months from Indian equities in January, the exodus of foreign portfolio investors (FPIs) continued in February. However, the pace of selling has come down compared to January. In February, till now, foreign investors have sold Indian equities worth ₹2,300 crore.
This comes primarily due to the attractiveness of the Chinese markets.
Before the massive FPI selling in January, foreign investors bought Indian equities worth ₹11,119 crore in December and ₹36,238 crore in November, data with the depositories showed.
Overall, FPIs sold Indian equities worth ₹1.21 lakh crore in 2022, which is the highest-ever yearly outflow. In 2022, FPIs were net buyers in only 4 of the 12 months of the year - July, August, November and December.
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.
Going ahead, experts expect FPI flows to remain volatile as Indian equities continued their underperformance compared to global markets. Further, China re-opening post the COVID scare has shifted the FPI trend toward Chinese markets. FPIs are selling in India and buying in cheaper markets like China, Hong Kong, and South Korea where valuations are attractive, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Indian benchmark Nifty has lost over 4 percent in 2023 YTD. In comparison, the Chinese benchmark Shanghai Composite is up over 5 percent this year.
Experts also pointed out that rising rates in the US might lead to more capital outflows from emerging markets including India.
Nishit Master, Portfolio Manager, Axis Securities PMS noted that with China opening up after Covid, there was an expectation amongst global investors that there will be a spurt in growth after a couple of years of intermittent lockdowns, as seen elsewhere globally when a particular country opened up after Covid. This development led to FPI inflows in China.
"The evidence from China has been mixed after opening up, and there is a high possibility that the growth spurt post-opening up might not materialize to the expected extent. If the growth expectations from China start moderating, money will start flowing back to India as India remains the fastest-growing major economy globally. In an environment where global growth is slowing, FPI money will chase growth," he explained.
He believes that once we start witnessing the global economy slowing down, including other emerging markets like China, FPI investments will again start flowing to India to chase growth. Another trigger for FPI flows returning to India will be interest rate cuts by global central banks which seem unlikely in the immediate future, Master noted.
Satish Menon, Executive Director at Geojit Financial Services also stated that he has a cautious view for 2023, and the actual performance has been weaker and more volatile ing than anticipated with the key challenges are selling from FIIs, high-interest rates, elevated inflation, slowing earnings growth, and premium valuations in India.
"MSCI-India was trading at more than 50 percent premium to other EMs, which is expected to narrow in the short to medium term. Other EM earnings growth is expected to improve as a result of the end of the zero-tolerance policy, while India is expected to experience an economic slowdown due to a drop in external demand and high inflation," he highlighted. Menon expects a reversal in the FPI trend and interest policy changes from ‘aggressive’ to ‘neutral’ in the second half of the calendar year 2023.