FPI outflows to be short-lived: Here's where they have been investing

Foreign portfolio investors' (FPIs) purchases of domestic shares fell to a five-month low at Rs 7.37 billion on a net basis in the first half of August,amid declines in both domestic and global markets due to rising interest rate concerns in the US and worries over China's economy. This is the lowest inflow since FPIs turned buyers in March. They had last net sold shares worth Rs 52.94 billion  in February, according to data compiled by Reuters.

Reuters data shows that in the March-July period, FPIs bought domestic shares worth Rs 1,553.08 billion,  triggering a 14.15% rise in Nifty 50 index. In contrast, the blue-chip fell 1.62% in the first half of August. Moreover, FPIs turned net sellers in financial services in the first half of August, offloading Rs 28.21 billion, after buying shares worth Rs 555.79 billion  over the last four months.

However, brokerage ICICI Securities believes that FPI outflows will be short-lived. 

FPI outflows likely to be short-lived as spike in US 10-year bond yields take it to the upper end of the range seen over the past year although it does not indicate a breakout.

US 10-year bond yields have been oscillating around the 4% mark (3.4-4.3%) over the past one year as the US Fed approaches the end of its jumbo rate hike cycle driven by a moderating inflation outlook. 

"The most recent surge in US yields from 3.75% to 4.3% was triggered by the rating downgrade by Fitch and is putting pressure on FPI flows towards India. However, the US 10-year bond yield is likely near its upper range given the outlook for inflation. This should alleviate concerns around FPI outflows even as structural domestic equity flows in India continue to be positive as evidenced by record-high SIP flows. Growth outlook for India relative to China continues to be robust driven by a strong investment and real estate cycle supported by low NPAs in the system," said Vinod Karki of ICICI Securities. 

Overall FPI inflows since April 23 have been strong at $19 billion

Mutual funds have bought stocks worth $1.8 billion since April 2023. However, overall DII flows since April 23 have seen muted inflows of $1.1b billion,  suggesting selling by insurance firms. On TTM basis, FPIs have been net buyers of Indian stocks worth $20.4 billiom.  Post the recent spike in US bond yields, EM equity flows have declined although India flows have been relatively better, according to Karki. 

FPI flows trends across EMs and DMs – India flows relatively better

Source: Bloomberg, I-Sec research

Note: China data is available till Jun’23 while for Aug’23 data is till date for other countries.

Aggregate holdings of FPIs stand at  Rs 53.2t trillion, implying 17.4% holdings of Indian equities as of 31st Jul’23, up from 17% in June 22.FPI holding of NIFTY50 index nudged up 140bps during Q1FY24 to 23.8%.

FPI holding of NIFTY50 index nudged up 140bps during Q1FY24.

For JulY 23, FPI portfolios bought across sectors and continue to load up risk (beta and value stocks) while MFs saw mixed trends: Data on aggregate sectoral institutional flows during Jul’23 indicates FPIs continued buying risk (high beta and value) in the form of stocks largely related to cyclical and capital-intensive sectors (financials, industrials, discretionary consumption, energy). However, active MF funds saw mixed trends with buying in financial services, IT, healthcare, metals and staples – while selling was observed in energy, industrials, private banks, auto and telecom.

FPI adds active risk

FPI Sectoral fows since April 2023