The first two days of September were volatile for foreign portfolio investors (FPIs) after their strongest buy in August, thanks to the dollar hitting a two-decade peak. Foreign investors made the biggest investment of the year in August 51,200 crores. However, the bullish momentum that is possible in September will require some patience and clarity of policy outcomes. Emerging markets are currently facing pressure on bond yields on the back of a record dollar and the US Fed’s aggressive monetary policy outlook.
NSDL data shows FPIs pumped 1,963 crore from 1st September and 2nd September equity Market. This is more than their investment in debt. Market who was around 119 crore, while debt VRR and hybrid equipment saw outflow 523 crore and 24 crores.
Overall, FPIs have invested 1,535 crore (including equity, debt, debt-VRR and hybrid) in the Indian market in the first two days of the current month.
In August, FPIs made their biggest investment 51,204 crore year-on-year in the equity market. Inflows were also recorded in loan and loan-VRR instruments 3,845 crore and 2,997 crore respectively. However, FPIs were net sellers who had outflows 1,525 crore in the hybrid market.
FPI broke records in equity market from January to June this year 2,17,358 crores. in June. Highest sell-off witnessed in the year with outflow of 50,203 crores. However, some outflows in equities have recovered due to buying in July and August.
As of now, in the equity market, FPI outflow is approx. 1,59,202 crore. That said, the equity market saw a recovery Buying in July and August led to selling of Rs 56,193 crore in FPIs. September has started on a shaky note, and whether this month will turn out to be as fruitful as the previous two months of Q2 FY13 will be keenly watched.
Will the buying trend of FPIs continue?
Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, “September has started with huge volatility in FPI inflows. FPIs bought equity value on 1st September. 4262 crores through the exchanges but the very next day they sold the equity value 2261 crore (Source: NSDL). This erratic trend is due to uncertainty regarding the dollar index and US bond yields. Dollar and bond yields are believed to have peaked and the Fed will be less aggressive than now when inflation begins to ease. This will facilitate more capital inflows into emerging markets and India is the best emerging market to invest in right now.”
Explaining why peak dollar and bond yields will have limited impact on FPI sentiment, Vijayakumar said, “The second view is that since inflation is high, the dollar will continue to rise and capital flows into emerging markets will be adversely affected.” “The trend is not there yet. Clear. FPIs are likely to continue investing in India. They have learned that exit is easy but entry is expensive.”
“FPIs are buying financials, capital goods auto and FMCG. This trend is likely to continue,” the chief strategist said.
According to analysts at ICICI Securities, Vinod Karki and Neeraj Karnani are expected to continue buying in the second half of 2022.
In their strategy report, the two said, “We believe that the sharp remarks made by the chairman of the US Federal Reserve at the Jackson Hole symposium are an extension of the QT (quantitative tightening) cycle that began last year (CY21) and its The result was the largest volume of FPI outflows from India in a one-year period ($33 billion for the TTM period ending June’22 including primary inflows).
“The mass outflow, in anticipation of the peak QT cycle of the 1960s-80s, was probably a redundancy that is correcting through inflows seen since July’22,” analysts said.
Going forward, the analysts said, “While not as extreme as originally thought, we remain in a QT cycle, which will result in volatility from FPIs, though the phase of ‘unprecedented sustained selling’ continues to be in our hands.” The trajectory of inflation going forward in the US will be a major determinant of FPI inflows towards EMs in general, including India. Overall FPI inflows for CY22 can be clearly demarcated in the selling phase of H1CY22 and Now buying can resume in H2CY22.”
Last month, US Federal Reserve Chairman Jerome Powell hinted at keeping interest rates high to fight inflation at the expense of economic growth in a Jackson Hole speech. This created fear among investors about an economic slowdown and cautious sentiments led to volatile conditions. Road had expected a slowing of rate hikes after an inflation reading in July, which came in at 8.5% — better than expected — from a four-decade high of 9.1% recorded in June.
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