FPIs Turned Net Buyers Once Again in March 2023

To an extent, the month of March 2023 was a welcome change from the aggressive selling of January and February earlier this year. In January and February 2023, FPIs sold Indian equities worth $4.21 billion due to expectations of further hawkishness from the Fed and fears of an impending global slowdown. March has been better with FPIs ending up as net buyers to the tune of $966 million. However, this was largely accounted for by the $1.9 billion purchase of Adani group shares by GQG Investments. For the rest of March 2023, it was the SVB Financial crisis and the Credit Suisse crisis that ruled the roost.

In March, if the GQG effect was excluded, FPIs were predominantly on the sell side for most of the days. Between October 2021 and June 2022, FPIs net sold equities worth $34 billion. If you look at calendar year 2022, FPIs net sold $16 billion in equities. In 2023, January and February saw net FPI selling of $4.20 billion which turned around to a net buy figure of $966 million in March 2023. To understand the underlying trend, we must look at the FPI flows in a more granular fashion.

How FPIs bought and sold equities in March 2023

The table below captures the daily flows from foreign portfolio investors (FPIs) into Indian equities in March 2023; both in rupee and in dollar terms.

Data Source: NSDL

In retrospect, two major global events actually triggered the FPI flows in March 2023.

• The first and the biggest factor was Fed hawkishness. Central banks like the Fed were unhappy with the pace at which consumer inflation had responded to rate hikes. This led to a policy consensus that rate hikes will have to continue for longer and terminal rates would also be higher. That had a dampening impact on FPI flows in March 2023.
   

• However, that was partially attenuated by the banking crisis. Now, logically, the banking crisis did create panic in banking stocks, which are the heavyweights in most markets. But it also had a salutary impact on the markets. For instance, the argument was that if the banks are in a crisis, then higher rates would dampen the recovery. Hence, the markets were veering towards the view that central banks may go slower on rate hikes. The central banks are adamant that the banking crisis would not impact their rate policy, but such brave talk only works till something becomes a crisis. So, we have to keep our fingers crossed; but it surely softened the impact on the markets.

FPIs continued to be net sellers on most days in the second half of March 2023 after the banking crisis had broken out.

Are Indian FPIs a worried lot?

Does the March 2023 FPI flow data betray signs of worries among investors and foreign portfolio investors. Here is what we read from the data.

• March FPI numbers looked impressive but may be skewed due to the GQG Investment into Adani group stocks. Out of the 20 trading days in March 2023, 10 days saw FPI selling and 10 days saw FPI buying on a net basis. However, post the banking crisis outbreak in the US and Europe, FPIs predominantly sold in Indian equities.
   

• FPIs have been tad unhappy that the Indian central bank has not been as aggressive as the Fed in hiking rates. FPIs argue that the outcome is visible since the US has seen better outcomes in controlling the consumer inflation compared to India. However, that is not a very valid argument since India has growth in its favour.
   

• In December quarter, corporate numbers witnessed pressure from weak rural demand and tepid consumer spending. That has led to tepid growth in the top line. In addition, the 250 bps rate hike by RBI resulted in a sharp spike in the cost of funds, leading to interest coverage going down. That has made FPIs uncomfortable investing in India.
   

• Perhaps, the biggest worry for FPIs is the overt dependence of the Indian markets on the BFSI sector. The Nifty has a 36% exposure to financials and if you look at the break up of FPI AUC (assets under custody), that is also over 33% in BFSI sector. The banking crisis could result in a downward revision of bank earnings and that is not good news for FPIs. It could trigger risk-off selling, if the banking crisis exacerbates in a big way globally.

To sum it up, year 2023 began on a negative note and March FPI flows were saved only due to the GQG factor. FPIs continue to be cautious and that is likely to keep FPI flows under pressure in the near future.

What could be the FPI flow scenario in FY24? Most of the concerns of FY23 still persist and that is not going away in a hurry. It is feared that many more banks in the US and Europe could unravel; especially the small and mid-sized banks. It remains to be seen how the central bank stance changes in line with the emerging crisis situation. One more area to watch out would be the recovery in China; and that is where some good news is expected.