FPI flows have begun moderating, according to a report by ICICI Securities.- The report says that this could be a leading indicator of the
US Fed ’s quantitative tightening cycle peaking. - This could be a signal that US Fed’s aggressive rate hikes may be approaching their peak, the report adds.
After the nine-month sell-off, FPIs turned positive for two months – July and August – investing over $7 billion, according to data from NSDL. This also had a notable impact on the Indian stock markets, with the benchmark Nifty50 index rallying 12.5% in these two months.
According to a report by ICICI Securities, FPI flows are now moderating.
Between October 2021 and June 2022, FPIs pulled out an average of $4 billion a month from the Indian markets. However, from July till date, the average FPI flows have been positive, at $1.4 billion a month.
Even without August, when FPIs invested $7 billion, the net FPI flows on average are -$0.45 billion a month, which is nearly 9x lower than the outflows in the October 2021 to June 2022 period.
This, according to the ICICI Securities report, could be a leading indicator of the quantitative tightening (QT) cycle peaking.
“Although the flows started to turn negative since October 2021 in anticipation of the quantitative tightening cycle, the US Fed actually started delivering jumbo rate hikes from May 2022 (one 50 bps and three 75 bps rate hikes) along with reducing its balance sheet,” the report said, explaining how the FPI outflows were ahead of the beginning of the QT cycle.
Quantitative tightening refers to monetary policies which reduce the liquidity in the system, either by selling government bonds or letting them mature.
“On the other hand, FPI flows towards India and other emerging markets from July 2022 started to turn largely positive with bouts of moderate selling. The above behaviour could be again signalling that the aggressive rate hikes by the US Fed may be approaching its peak going ahead,” the report added.
The report notes that there is a possibility that the terminal rate expectation of 4.5-5% could be breached on the upper end.
Another factor in the FPI flow moderation, according to Hitesh Jain, lead analyst, Yes Securities, is that an exodus of investments from Russia is finding an alternative in India.
“FIIs are now pouring money in domestic-facing sectors like banks and consumption stocks which are immune to global shocks and traction is apparent in terms of India’s credit growth and consumer spending,” he said.
Despite the sell-off by FPIs, domestic investors have cushioned the Indian markets with a net buying of ₹3.26 lakh crore from October 2021 till date.
While FPIs have been net investors in only two months, domestic investors have been net investors in 12 out of the 13 months in consideration.
“Domestic flows continue to cushion volatility in FPI flows which is augmented by the ETF revolution in India. Equity ETF AUM has risen 25x since FY16 driven by a low base and rapid growth while equity-oriented AUM of mutual funds has grown 4.5x since FY16,” the I-Sec added.
Here’s how Indian markets have held up against their global counterparts in the last one year:
Source: Morningstar, data as of October 19, 2022.
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