Why FPI outflows likely to be short-lived. Explained

The US 10-year bond yields have been swinging between 3.4 and 4.3% over the past year as the Fed nears the conclusion of its massive rate rise cycle, which is being pushed by a declining inflation outlook, according to the brokerage’s analysis on institutional flows.

Fitch’s downgrading of the US yield was the trigger for the most recent spike, according to the brokerage’s analysis, which also indicated that FPI flows to India are being affected. The US yield shot up from roughly 3.75% to 4.3%.

“However, the US 10-year bond yield is likely near its upper range given the outlook for inflation. This should alleviate concerns around FPI outflows even as structural domestic equity flows in India continue to be positive as evidenced by record-high SIP flows. Growth outlook for India relative to China continues to be robust driven by a strong investment and real estate cycle supported by low NPAs in the system,” said the brokerage in its report.

Overall FPI inflows since April 2023 have been strong at USD 19 billion

Mutual funds (MFs) have invested USD 1.8 billion in stocks since April 2023. But since April 2023, there have been tepid inflows of USD 1.1 billion into the aggregate domestic institutional investor (DII) flows, which may indicate that insurance companies are selling.

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“On TTM basis, FPIs have been net buyers of Indian stocks worth USD 20.4 biilion. Post the recent spike in US bond yields, emerging markets (EM) equity flows have declined although India flows have been relatively better,” ICICI Securities said.

The brokerage said that the total amount of FPI holdings is ₹53.2 trillion, which means that as of July 2023, 17.4% of Indian shares were held, up from 17% in June 2022. During Q1FY24, FPI holdings of the Nifty 50 index increased by 140 basis points to 23.8%.

FPI portfolios continued to load up on risk (beta and value stocks) for July 2023, while MFs witnessed mixed results

Data on overall sectoral institutional flows during July 2023, according to the brokerage’s report, shows that FPIs kept purchasing risky (high beta and value) stocks, mostly associated with cyclical and capital-intensive industries (financials, industrials, discretionary consumption, and energy). Though there were mixed trends noted in active mutual funds, purchases were made in financial services, IT, healthcare, metals, and staples, while selling was done in energy, industrials, private banks, autos, and telecom.

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“Active ‘market cap’ based MF portfolios (large, mid and small cap funds) continue to see much higher amount of buying by small and mid cap funds as compared to large cap driven by flows into such schemes, which indicates domestic investors’ propensity to add ‘size risk’,’ the brokerage said.

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“Active ‘market cap’ based MF portfolios (large, mid and small cap funds) continue to see much higher amount of buying by small and mid cap funds as compared to large cap driven by flows into such schemes, which indicates domestic investors’ propensity to add ‘size risk’,” added ICICI Securites. 

Updated: 21 Aug 2023, 07:21 PM IST