FPIs rush to sell EM equities in August after US downgrade, flows positive for India

• FPIs continue to invest in high beta stocks and sectors in India despite US sovereign rating downgrade. India’s net FPI inflows in August stand at $1.1 bn.
• FPIs sell stocks aggressively in Taiwan, Thailand, Brazil, South Korea and Indonesia in August.
• FPI flows into Indian equities are not just restricted to passive funds alone since July.

Foreign capital flows into Indian equities have slowed substantially in August, after portfolio investors pumped in over $19 bn over April and July. Despite the slowdown, India continues to be a bright spot for global investors. Data shows that foreign portfolio investors have been net sellers of equities in other key emerging markets like Thailand (-$346 mn), Taiwan (-$3.8 bn), South Korea (-$1bn), Brazil ($1.7bn) and South Africa ($365 mn) in August.

Developments in the last one month do not bode well for capital flows with the Dollar Index beginning its upward journey again in August after rating agency Fitch downgraded the US sovereign rating to AA+ from AAA as the government’s debt burden has continued to increase over the years. On the back of the downgrade, the yield on the 10-year T-bill jumped from 3.75% to 4.3%. However, the long-term outlook for India continues to be positive as flows into India are more to do with its structural factors.

Explains Jahnavi Prabhakar, economist at Bank of Baroda, “Indian economy remains a favored place for investment as has been reflected by strong FPI flows in the past few months. This is likely against the backdrop of stable government policies, robust macro fundamentals, stable inflation and sustainable growth rates. On the other hand, global economies have been witnessing challenges of slower growth, elevated inflation, fears of recession and rate hike cycle by Central Banks.”

According to ICICI Securities, outflows from India led by foreign portfolio investors are likely to be short-lived as Indiaˀ’s growth outlook remains intact. Typically when foreign investors are in risk-off mode on rising bond yields back home and a stronger dollar, they tend to avoid risk. However, FPIs have been bulking up on risk since the start of FY24. According to July data, FPIs continued buying high beta stocks related to cyclical and capital-intensive sectors. Their preferred sectors included financials, industrials, discretionary consumption and energy.

Aggregate holding of FPIs now stand at a cumulative Rs 53.2 trillion, which suggests that they now own 17.4% of Indian equities as of July 2023 against 17% in June 2022. FPI holding of the Nifty50 index also inched up 140 basis points to 23.8% in the first quarter of FY24. On a trailing twelve months basis, FPIs have invested $20.4 bn in Indian equities and while other flows into other emerging markets have moderated after the US downgrade, India continued to see positive flows. In August, Taiwan, Brazil, Thailand and South Africa saw net outflows, while India has seen inflows of $1.2 bn. Foreign investors have been consistently selling equities in Taiwan barring a few months of positive flows since last year.

According to Kotak Institutional Equities, listed emerging markets inflows were positive for all countries in July. China witnessed flows of $6.2 bn of flows while India saw $4.14 bn in July. So far analysts have been saying that most of the capital flows into India were in passive funds or ETFs but the tide has decisively turned in June and July with allocation coming from active funds too. According to Kotal, India dedicated funds saw allocation of $1.6bn which were led by $1.2 bn of non-ETF inflows in June.

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