FPIs infuse $2.83 billion into Indian equities in August

It looks like happy days are here again for FPI flows into India. After 9 consecutive months of selling by the FPIs between October 2021 and June 2022, there was a positive turnaround in July 2022. Of course, the total inflow of $634 million in July 2022 was dwarfed by the $33 billion of FPI outflows in the 9 months prior to that. Comparatively the FPIs have infused close to $2.8 billion into Indian equities in the first half of August. Has the tide finally turned and triggered this shift in sentiments? But, first the numbers.

Data Source: NSDL

To get a full picture of the FPI flows in the first half of August, one needs to look at the cumulative column for rupee FPI flows and dollar FPI flows. Both are one and the same, just as the dollar values are converted daily at the prevailing closing exchange rate. Despite a truncated week, the FPIs infused Rs22,452.55 crore into equities, equivalent to $2.835 billion. That is a lot of FPI money and does hint at a turnaround in sentiments. While the tide may not have turned, the signals are surely positive for India Inc.

What has driven this turnaround in FPI flows?

There seems to be a combination of factors that have fallen in place in the month of August. Here are a few key factors that have triggered this turnaround in FPI flows.

1. Finally, the US inflation fell from 9.1% to 8.5% in the month of July 2022. That is an indication that the monetary hawkishness is working. While the Fed is likely to continue to hike rates, the expectation is that the rate hikes would be more calibrated and cautious, so the risk of big capital flows out of EMs is not a risk any longer.

2. It is not just the US Fed, but even the RBI is seeing positive data flows. For instance, the retail inflation has now come down by 108 basis points over the last 3 months from 7.79% to 6.71%. Even the WPI inflation has fallen sharply in July from above 15% to below 14%. This should give room for RBI to also be less hawkish.

3. The Q1FY23 numbers have just been announced for Indian companies. Net profits are down sequentially but that has been largely driven by the Rs20,000 crore of net losses reported by downstream OMC companies. Also, with a lot of loss making digital plays now listed, that is also depressing profits. Adjusted for that, the numbers are still better.

4. There are major hopes that the government may go all out to make life simpler for the retail tax payers. Already, there are discussions about a lower rate of flat tax, sans any exemptions. That should be a major boost for purchasing power and is likely to give a big boost to consumer stocks.

5. Lastly, the rupee has taken solid support around the 80/$ levels. While the RBI may have limited room to intervene for long, the worst may be over for the rupee. That is a major incentive for the FPIs to invest as it gives them the additional advantage of dollar arbitrage by putting money into India.

It may be early to celebrate but one thing is that the worst could be over. Even the IMF has admitted that India would grow by over 7% in FY23. That makes India the fastest growing large economy. Between October 2021 and June 2022, the FPI exposure to Indian stocks fell from $667 billion to $535 billion. The reallocation has been taken care of. The time is now ripe for the FPIs to reallocate their funds to India at attractive valuations. The month of August may just be the first signal of that.