FII flows could remain shaky in 2023

By Siddhant Mishra

Foreign Institutional Investors (FIIs) have had a turbulent run in 2022, having been net sellers to the tune of ₹1.33 trillion so far this year. This is the first time in four years that FII flows have turned negative.

Since the beginning of the year, FIIs have continuously been net sellers, according to NSDL data. The trend saw a reversal in July and August, but they reverted to net sellers in September and October.

In November and December, they have pumped in a net `33,847 crore and `8,301 crore, with the equity component being `36,239 crore and `11,557 crore, respectively. On the other hand, domestic investors have pumped in `15,698 crore in December, after offloading `6,301 crore in November.

“Concerns over Covid in China is a negative, and the strong economic data from the US indicates continuation of the Fed’s hawkish stance, which is pushing bond yields up and equities down. In the first half of December, FPIs were buyers in auto, capital goods, FMCG, and real estate stocks. They were sellers in consumer durables, oil & gas, power, and financials. Macro data from the US and Covid news will drive FPI flows in the near term,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

BoFA Securities, in its market outlook for 2023, believes that a protracted recession in the US could mean FII outflows could continue. However, conservative estimates suggest that provident fund, pension fund, insurance funds, and SIPs could contribute at least $20 billion (`1.65 trillion) into Indian equities in CY23.

There is merit to this outlook. According to Association of Mutual Funds in India (AMFI) data, the SIP inflow for November was `13,306 crore — a record high — with the total SIP AUM at `6.83 trillion.

The BoFA report, based on an analysis of historical flows, suggests India doesn’t compete with China for allocation of EM funds; they are directionally linked. A reopening in China could lead to higher EM allocation by FIIs, which will benefit India.

“Valuations are at a 10% premium to their long-term average, which is why FII inflows could stay volatile. A slowdown in the US and global economy, the Fed pivot, a strengthening yuan, higher crude ($100 avg), China reopening along with geo-political uncertainties driven by Russia-Ukraine and China-Taiwan, are the key events the year ahead,” said Amish Shah, MD and head (India research), BoFA Securities.

Further, India’s relative positioning within EM funds is at multi-year lows of 0.14% vis-à-vis its peak of 1.2% in 2015. On the other hand its weight in the MSCI index has reached multi-year highs of 16%, while China’s weight had fallen to 27% as of October. Hence, any incremental flow to China through the EM basket would imply inflows to India, says the BoFA report.

While FII flows are seen remaining volatile, at least till H1CY23, domestic flows are seen lending support to the markets. However, the rising deposit rates could be a risk, and the DII support could lose momentum, going ahead.

A recent report by Goldman Sachs suggested foreign flows could remain weak to start 2023, as equity leadership could shift towards China/ North Asia (in case China reopens faster than expected), but could pick up later in the year as domestic growth recovers in H2CY22, dollar likely reverses, and the global macro environment improves, thus giving a fillip to broad risk taking.

FII ownership in BSE200 stocks stood at a nine-year low of 21% (as of Q3CY22), and overall foreign holdings were about 18% of India’s listed exchange cap (6th percentile over the past decade) as of October-end, according to the Goldman Sachs report.

The strong DII buying was buoyed by continued inflows in MFs, even as the pace of monthly inflows slowed. Specifically, retail activity remains strong so far as evidenced by record inflows via SIPs, but individual ownership of listed equities has fallen from decadal highs, suggesting some moderation in direct buying of equities by retail investors.

Given the MF cash balances below long-term average levels, and a potential risk of further slowdown in equity inflows as domestic deposit rates continue to rise, domestic liquidity could turn less supportive in the near term.