After 2 months of negative foreign portfolio investor (FPI) flows, Indian equities for the first time in 023 saw net FPI inflows last month. FPI inflows for March 2023 were recorded at ₹7,963 crore even as the Indian market ended flat after an eventful month.
While analysts believe that the worst of FPI outflows is over, recovery in Chinese markets, global macro concerns and high interest rates will continue to keep flows in check.
For the first half of the month, the market was under pressure due to the banking challenges in the US and European markets which led to a massive correction in stocks and majority of the sectors were also in the red. However, in the second half, some of the banking challenges got reversed and sentiment revived with the buying seen in the beaten-down stocks.
Overall, in 2023 YTD, FPIs have sold Indian equities worth ₹23,844 crore. They recorded steep outflows worth ₹28,852 in January, highest in 7 months, however, it moderated in February before turning positive in March. In Feb, FPIs sold Indian equities worth ₹5,294 crore.
In the previous year, 2022, FPI outflow was recorded at ₹1.21 lakh crore, 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.
In a recent report, brokerage house Axis Securities pointed out that the pace of FII selling has reduced since July 2022 across emerging markets. Earlier, FIIs were pulling money from the emerging market on account of aggressive rate hike expectations. On a YTD basis, FIIs parked some money in S Korea, Taiwan and the Chinese equity market on account of their attractive valuation. However, some FII flows were back in March 2023 driven by the attractive valuations of the Indian equity market.
It noted that foreign investors have pulled out the majority of the easy money from the Indian market which they had pumped in after the Covid-19 crisis in March 2020. They have pulled out $23 billion in FY22/23 out of $37 billion pumped in, in FY21, nonetheless, the pace of selling has reduced in the last 3 months, Axis Securities noted.
"Now, with the Chinese economy opening up, its equity market is reviving and concurrently, the huge divergence between the FTSE India and EM market is shrinking. This has led the FIIs to park some capital in the Chinese equity market. While this has led to India witnessing FII outflow to the tune of $2.7 Bn on a YTD basis, on a brighter note, DIIs have added $10.1 Bn to the Indian equity market over the same period. Moreover, based on the attractive valuations and good economic outlook, India witnessed some FII flows returning in March 2023 during which FII added $1.6 Bn," it said.
The brokerage believes the worst of the FII outflow is now behind us as the strong earnings growth and economic recovery will play out in 2023. For the next 6-9 months, the evolving macroeconomic data points would continue to influence the market, it added.
FII flows are likely to remain volatile in the near term on account of macroeconomic uncertainty, however, India would be an attractive destination once the dust settles, predicted Axis Securities. This is on account of India’s stable political outlook, robust GDP growth, strong earnings growth expectation, and moderate fiscal deficit, it said.
Meanwhile, another brokerage, Kotak Institutional Equities, believes that India might have to compete within emerging markets for FII attention.
"Since 2008, FII flows in India have been dependent on growth prospects and interest rate differential. 2009-2010 witnessed flows driven by a preference for growth, 2012-2015 on interest rate differential and 2022 witnessed an outflow on successive rate hikes by the Fed. We expect higher for longer interest rates in developed markets to be business as usual in the very near term, though the market does anticipate rate cuts in CY2024 (up to 100 bps). Strong fundamentals are likely to remain a strong pull for FIIs," it stated.
Meanwhile, VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, believes other emerging markets are likely to attract higher FIIs.
"The sustained selling by FIIs was mainly due to the higher valuation in India. After the recent correction, valuations have become reasonable. But it is a fact that Thailand, S Korea, Taiwan and China are cheaper than India even now, and, importantly, EPS growth estimates for S Korea and Taiwan are higher than that of India. So, they are likely to attract more FPI flows than India," he said.
