The first two days of September emerged volatile for foreign portfolio investors (FPI) after their strongest buying in the month of August, thanks to the dollar that is at a two-decade peak. Foreign investors made their biggest investment of the year in August to the tune of more than ₹51,200 crore. However, the same bullish spree whether it is possible in September will need some patience and clarity of policy outcomes. Emerging markets currently face pressure from record dollars and bond yields sparked by the US Fed's aggressive monetary policy approach.
Data from NSDL shows that FPIs pumped in ₹1,963 crore from September 1st and 2nd in the equity market. This is higher compared to their investment in the debt market which was around ₹119 crore, while outflow was seen in debt VRR and hybrid instruments to ₹523 crore and ₹24 crores.
Overall, FPIs have invested ₹1,535 crore in the Indian market (including equities, debt, debt-VRR, and hybrid) in the first two days of the current month.
In August, FPIs made their biggest investment of ₹51,204 cr in the equities market year-to-date. Inflow was also recorded in debt and debt-VRR instruments at ₹3,845 crore and ₹2,997 crore respectively. However, FPIs were net sellers with an outflow of ₹1,525 crore in the hybrid market.
In the equity market, from January to June this year, FPIs pulled out a record ₹2,17,358 crores. June saw the most selling in the year with an outflow of ₹50,203 crore. However, due to buying in July and August, some outflows in the equities have been recovered.
So far, in the equity market, FPIs outflow is around ₹1,59,202 crores. That said, the equity market saw a recovery of ₹56,193 crore in FPIs selloff due to July and August buying. September has begun on a volatile note, and whether the month will be as fruitful as the previous two months of Q2FY23, will be keenly watched.
Will FPIs' buying trend continue?
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "September has begun with huge volatility in FPI flows. On 1st September FPIs bought equity worth ₹4262 cr through exchanges but the very next day they sold equity worth ₹2261 Cr. (Source: NSDL). This erratic trend is due to uncertainty regarding the dollar index and US bond yields. There is a view that the dollar and bond yields have peaked and when inflation starts trending down the Fed will be less hawkish than now. This will facilitate more capital flows to emerging markets and India is the best emerging market to invest now."
Explaining why peak dollar and bond yields will have a limited impact on FPIs sentiment, Vijaykumar added, "the other view is that since inflation is high the dollar will continue to rise adversely impacting capital flows to emerging markets. The trend on this is not yet clear. FPIs are likely to continue investing in India. They have learned that exit is easy but entry is expensive."
"FPIs have been buying financials, capital goods autos, and FMCG. This trend is likely to continue," the chief strategist added.
According to ICICI Securities analysts, Vinod Karki and Niraj Karnani expect buying to continue in the second half of 2022.
In their strategy report, the duo said, "We believe the hawkish comments by the US Federal Reserve chairman at the Jackson hole symposium is an extension of the QT (quantitative tightening) cycle which began last year (CY21) and resulted in the biggest quantum of FPI outflows from India over a one-year period ($33 billion for TTM period ending Jun'22 including primary inflows).
"The massive outflow, in anticipation of the 1960s-80s type of extreme QT cycle, was probably an overreaction which is correcting via inflows seen since July'22," the analysts added.
Going forward, the analysts said, "Although not as extreme as originally thought, we continue to be in a QT cycle which will result in bouts of volatility from FPIs although the phase of 'unprecedented relentless selling' seems to be behind us. The trajectory of inflation going ahead in the US will be a key determinant of FPI flows in general towards EMs, including India. Overall FPI flows for CY22 can be clearly demarcated into the selling phase of H1CY22 and now resumption of buying in H2CY22."
Last month, US Federal Reserve chair Jerome Powell in the Jackson Hole speech hinted at keeping interest rates high to fight inflation at the cost of economic growth. This sparked fear among investors about an economic slowdown and cautious sentiments had led to volatile conditions. The street had expected a slower pace of rate hike after the July inflation reading which came in at 8.5% --- better than expected --- from an over four decade high of 9.1% clocked in June.
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