FPI gross purchases hit a high in 2023 on strong earnings, economic growth

Foreign portfolio investors were net sellers in the first two months of 2023 but turned buyers in March amid moderating valuations

A combination of strong earnings and economic growth, and hopes of the Federal Reserve ending the rate-hike cycle have pushed gross buying of Indian equities by foreign portfolio investors (IPO) to a new high. In 2023, FPIs have been gross buyers of shares worth Rs 25.5 trillion, the highest ever in a calendar year.

FPIs also sold shares worth Rs 23.9 trillion. On a net basis, they were net buyers to the tune of Rs 1.6 trillion, the highest since 2020.

FPIs were net sellers worth Rs 1.25 trillion in 2022, and also in the first two months of 2023. They turned buyers in March amid moderating valuations. The Indian markets corrected nearly 10 per cent between December 1, 2022, and March 24, 2023.
 

From March to August 2023, they purchased equities worth Rs 1.7 trillion. FPIs turned net buyers amid easing valuations but stepped up their purchases amid corporate earnings, which were coming in line with expectations and solid macro numbers. The easing of the banking crisis in the US and China’s economic woes also helped sentiments.
 

“India's earnings were the best in the world. We have had double-digit earnings growth throughout the year. China has been struggling after its reopening, so some of the flows to China were shifted to India,” said Jyotivardhan Jaipuria, founder and managing director of Valentis Advisors.
 

FPI selling began again in September. The selling started initially to book profits but intensified due to rising US bond yields and uncertainty regarding the rate hike trajectory. The 10 US bond yields hit an intra-day high of 5.01 per cent on October 23, 2023.
 

Concerns about the escalating conflict in West Asia and crude oil prices surging after Hamas launched an unprecedented attack on Israel have added another layer of uncertainty and made FPIs flee risky assets.
 

The buying returned in November amid hopes that central banks in the developed world, especially the US Federal Reserve, have reached the end of their historic rate hike cycle. The Federal Reserve, in its December meeting, signalled that rate cuts are on the horizon, with some officials anticipating more than three-quarter point cuts next year. 
 

The bond yields have eased, and the 10-year US bond yield is trading at 3.9 per cent. In December so far, the FPIs have been gross buyers of shares worth Rs 2.5 trillion, the best December in terms of gross purchases.
 

However, the gains made by markets and elevated valuations have renewed concerns about selling going forward. The Nifty is trading at a one-year forward price-to-earnings ratio of 19.9 against its five-year average of 19.

“We have done very well this year, and we are expensive. At some point, there will be profit-booking bouts. But FPIs will come back to India. The only risk factor in the next six months is any negative surprise in the elections,” said Jaipuria.
 

However, some experts said that though the indices are expensive, the valuations of many large-cap stocks have eased.

"India's emerging market peers are dependent on China and the West, and neither of them is doing well economically. As a domestic-focused economy, India will continue to see strong growth next year," said Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers.