What happens after 8 months of persistent FPI selling?

It is hard to remember the last time foreign portfolio investors (FPIs) were consistently negative on Indian markets for 8 months in succession. Even at the peak of the COVID sell-off, the bounce from the lows of March 2020 was led by a sharp revival in FPI buying. However, since October 2021, there has been no respite in FPI selling.

Eight Months of persistent FPI selling

The table below captures the monthly FPI flows since October 2021 with a break up of equity and debt flows. The equity flows includes IPO flows too.

Data Source: NSDL

Here are some key takeaways from table above.

• Over the last 8 months, total FPI selling has been to the tune of Rs221,823 crore or approximately $29 billion. That is one of the worst bouts of FPI selling seen in India.

• The secondary market selling was actually much higher in equities during this 8-month period. However, overall number looks much lower due to the surge in IPO flows.

• Even in the month of May 2022, the secondary market outflows were the highest since March 2020, but IPO flows into LIC and Delhivery saved the day

• In the month of May 2022, the FPI flows into debt were positive because of the positive flows into VRR debt.

• Over the last 8 months since October 2021, FPIs have been persistent net sellers in secondary market equities and overall.

The overall selling of Rs2.22 trillion in equity and debt combined is the worst bout of selling ever seen from FPIs and even beats the selling seen around the COVID pandemic or even the peak of the Global Financial Crisis of 2008.

What we read from past FPI flow trends

We look at 4 specific bouts of selling; GFC selling in 2008, taper tantrum selling in 2013, downgrade selling in 2018 and the COVID selling in 2020.

1. Let us look at GFC of 2008 first. For the calendar year 2008, the FPIs sold Rs52,987 crore in equities but they bought Rs11,771 crore in debt, resulting in net FPI withdrawals of Rs41,216 crore. If you look at the peak pressure period of September and October 2008, the total FPI selling in equities was just about Rs23,600 crore at the peak.

2. In 2013, the taper tantrum led to a sharp sell-off by FPIs. The FPIs sold Rs50,854 of debt but bought Rs113,134 of equities resulting in net inflows of Rs62,280 crore in 2013. Debt outflows in the peak period from June to October 2013 was close to Rs75,000 crore. In terms of debt market selling by FPIs, this remains the most intense period.

3. Year 2016 did see some selling towards end of the year by FPIs due to demonetization but that was short lived. However 2018 was a year in which FPIs were seen selling quite aggressively. During the year, FPIs sold Rs33,014 in equities and Rs47,795 crore in debt resulting in overall outflows of Rs80,919 for the year. The selling was concentrated around September and October 2018 when the rates were hiked by the RBI and both IL&FS and DHFL went bankrupt. FPI selling was Rs60,000 crore in these 2 months.

4. We finally come to COVID period of 2020. Despite pandemic fears, year 2020 saw net inflows of Rs103,156 crore. While debt saw outflows of Rs104,873 crore, equity saw revival inflows of Rs170,262 crore. The month of March 2020 remains the worst month ever with overall FPI selling of Rs118,203 crore, almost in equal measure in equity and debt. However, equities saw smart buying in the second half of 2020, amidst aggressive monetary and fiscal revival measures.

Circa 2021-22: How does it compare with previous FPI selling bouts?

How do tprevious bouts of FPI selling in last 15 years compare with 2021-22? In terms of impact, the GFC was the most intense. Apart from the 60% correction, it took more than 6 years to recoup previous highs. In terms of debt market selling, 2013, remains the most intense as the high current account deficit resulted in a free fall in the rupee. The taper tantrum exacerbated the debt outflows. Year 2020 was known more for its sharp sell-off, and an equally sharp recovery in equity flows.

How does 2021-22 stack up. In terms of FPI selling in equities, never before has it been so persistent over an 8-month period. The overall outflows in the first five months of 2022 at Rs1.78 trillion more than offset the net inflows from FPIs in the preceding 4 years between 2018 and 2021. That puts things in perspective.

Where does FPI selling go from here?

The million dollar question now is where does FPI selling go from here. There are 5 factors.

1. Much of the selling in last 8 months was on fears that RBI may not keep pace with the Fed on hawkishness. With the RBI also turning hawkish, that risk has diminished.

2. From an FPI perspective, you need to look at the market correction in dollar terms. A 15% correction in the Nifty with 8% rupee depreciation, translates into 23% correction in the market for FPIs. That is a more attractive valuation point for FPIs.

3. Despite the macro and geopolitical risks, even the World Bank and IMF have affirmed that India will remain the fastest growing large economy in FY23 and FY24. That should act as a support for markets.

4. For most FPIs, investing in India is also a rupee arbitrage play. With the rupee having corrected close to Rs78/$, the worst case risks may be factored in, inducing FPIs to re-enter the Indian markets.

5. If you look at the history of FPI flows over last 20 years, every year of selling has been followed by a year of much more intense buying. History seems to favour FPI inflows.

The only concern on FPI flows is if the Fed persists with hawkishness. Incidentally, in any long term debate between discipline and growth; it is growth that has normally won. The Indian markets can take solace from that.