After 6 straight months of inflows, foreign portfolio investors (FPIs) turned sellers in September. FPIs sold Indian equities worth ₹14,768 crore during the month on the back of a rise in US bond yields and higher crude oil prices.
However, despite FPIs becoming sellers, Indian benchmarks delivered positive returns, even hit new peaks, in September on the back of strong domestic investor inflows as well as the successful G20 summit. However, the second half of the month witnessed some consolidation dragged by high US bond yields and a rise in crude prices.
Nifty rose 2 percent in September after a 2.5 percent decline in August. Before this, Nifty jumped as much as 2.9 percent in July, in the green for the fifth straight month, after a 3.5 percent rise in June, a 2.6 percent jump in May, a 4 percent rally in April, and a 0.3 percent gain in March.
Before turning net sellers in September, FPIs infused 12,262 crore in August. Meanwhile, the net inflow was at ₹46,618 crore in July, ₹47,148 crore in June, and ₹43,838 crore in May. Before that, ₹11,631 crore was infused in Indian equities in April and ₹7,935 crore in March, data with the depositories showed.
However, in the first 2 months of the current calendar year, FPI investments were in the red. They sold equities worth ₹28,852 crore in January and ₹5,294 crore in February. Overall, in 2023 YTD, the FPIs have made inflows worth ₹1.20 lakh crore.
In terms of sectors, FPIs are consistently buying capital goods. And, lately, they have started selling financials.
FPIs invested ₹939 crore in the country's debt market during the period under review, taking the total investment to ₹29,119 crore in the debt market so far this year. However, this is a major decline from ₹7,733 crore infused in the debt segment in August.
Before August, the month of June saw the highest FPI inflows into debt securities at ₹9,178 crore.
The calendar year 2023 is also the first time in 4 years FPIs have become net buyers of Indian debt. Before this, FPIs were net buyers of Indian debt in 2019, when they invested ₹24,058 crore into bonds.
Going ahead, the rise in bond yields and crude oil prices may keep inflation elevated and foreign investors away from riskier markets in favour of safer options like US treasuries. Experts also believe that FPIs have adopted a wait-and-watch approach to watch out for macroeconomic concerns like inflation and how central banks deal with it.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services
This sustained selling has been in response to steady dollar appreciation which took the dollar index close to 107 and the steady rise in the US bond yields which took the US 10-year bond yield to around 4.7 percent. The spike in the Brent crude to $97 also weighed on FPI selling.
However, last Friday (29th Sept) witnessed a marginal decline in the dollar index, US bond yields, and Brent crude. This has emboldened the DIIs to buy aggressively thereby imparting resilience to the market.
Since valuations remain high, FIIs are likely to press sales so long as this trend persists. It would be irrational to expect the FIIs to buy aggressively when the US 10-year bond yield is high. Even after the recent correction, Nifty is trading around 20 times FY 24 earnings, making India the most expensive market in the world. No doubt, India has the best growth and earnings prospects among the large economies of the world. So, if the markets correct further, by say 3 to 4 percent, FIIs can turn buyers even if US bond yields remain high. FII selling can be an opportunity for domestic investors who don’t have to worry about the dollar index and US bond yields. When high-quality stocks in performing sectors like banking and capital goods decline, these can be bought for handsome long-term gains.