FPI selling intensity abates in July, as global macros improve & commodity prices cool

• FPIs sell stocks worth ₹9,326 crore in July, against ₹58,112 crore in June this year.
  
• Selling intensity has abated because the market expects the Federal Reserve to hike interest rates by 75 basis points.
  
• Experts say it is too early to call it a trend as FPIs will only buy risky assets if the Dollar Index comes down from its highs.
  

Foreign portfolio investors have been selling Indian equities aggressively since October 2021 and the total sell-off now stands at $35 billion. But the intensity has abated in July, prompting experts to stick their necks out and say that the worst may be over.

For the last several months, FPIs have sold more than ₹10,000 crore a week, with June being the worst month when they dumped stocks worth ₹58,000 crore. So far in July they have sold only ₹9,326 crore and they were net buyers on Tuesday (₹976 crore).

Foreign investors have for long been price-setters in the Indian market, but with retail investors turning bullish on equities, the sharp selling by foreign investors has not had the same impact on the benchmarks as it did back in 2008 and 2013.

Market experts believe that the selling intensity has abated because the interest rate hikes by the US Federal Reserve has been priced in and commodity prices have also started cooling.

What to watch out for?

The next meeting of the Federal Open Market Committee (FOMC), the monetary policy-making body, which sets the interest rates, to be held on July 28-29 is important. If interest rates are hiked by 75 basis points then it would be a positive for emerging markets like India. However, a rate hike of 100 basis points would result in the US dollar strengthening further. This in turn would put further pressure on the rupee.


Explains Shrikant Chouhan, head of research at Kotak Securities, “FPI selling intensity has come down in the last few days, particularly in July. What is crucial is Fed’s move in the upcoming meeting. The assumption is that commodity prices are cooling so the Fed may be inclined towards a rate hike of 75 basis points. It is crucial to see whether FPIs remain positive or not. FPIs will only buy risk assets if the Dollar Index comes down from its highs of 106 levels.”


Apart from the currency movements, inflation and crude oil prices will also be key to monitor. While several commodities have come from elevated levels, Brent Crude continues to trade above $100/bbl. Emerging economies like India are faced with a double whammy of higher crude prices and a weaker rupee.


When the rupee declines against the Dollar, imports become more expensive. India’s current account deficit has increased from $26.18 bn in June to $24.3 in May, which has put further pressure on the rupee.


When the rupee declines, FPIs get fewer Dollars for the same asset. It is for this reason that they sell down emerging market assets when the currencies start weakening. During the global financial crisis, FPIs sold $19 billion worth of equities, triggering a 67% fall in the Sensex.


Says Pranav Haldea, managing director of Prime Database Group, “The last few months have seen a sharp sell-off by foreign portfolio investors. With valuations of Indian equities improving and global macros showing stability in terms of direction, there is some relief. Upcoming Fed policy and Rupee/Dollar movements will be the next important triggers.”

When can you say the tide has turned decisively?

The selling intensity may have come down, but it is too early to celebrate. There are several macro indicators that are still volatile and there is no clarity on what may happen when the Federal Reserve begins to unwind its massively expanded balance-sheet, which will begin in September. However, if inflation and commodity prices cool meaningfully by then, then FPIs may return to buy more stocks.


Says Gautam Duggad, head of research (institutional equities) at Motilal Oswal Financial Services, “Selling by foreign portfolio investors has reduced in the last few days. We have to observe for a few days more before forming a definitive view on the flows. India is currently standing out with a very robust earnings growth despite many macro headwinds. If inflation comes off and so does crude then FII selling could abate further.”

What will also help attract more money to India is not just strong earnings, but a stable rupee. The rupee’s advantage is that it has depreciated much less compared to some other emerging market currencies.

Adds Chouhan, “Currencies that are relatively stable will be a consideration for FPIs before they start putting money into EMs. Another positive is that the US 10-year bond is finding it hard to remain over 3%, which indicates that the trend is turning.”