Year-Ender 2022: FPIs dump Indian shares with record net outflow of Rs 1.2 lk cr this year; revival expected in 2023

The huge outflow, which surpasses by a big margin the previous record of Rs 53,000 crore net withdrawal in 2008, came amid aggressive rate hikes by central banks globally but 2023 is expected to be better on positivity about overall macroeconomic trends in India, experts said.

Apart from global monetary tightening, volatile crude, rising commodity prices along with Russia and Ukraine conflict led to an exodus of foreign money in 2022. Pic: Pixabay

After three consecutive years of infusing huge funds, foreign portfolio investors retreated from the Indian equity markets in a big way in 2022 with the highest-ever yearly net outflow of nearly Rs 1.21 lakh crore.

The huge outflow, which surpasses by a big margin the previous record of Rs 53,000 crore net withdrawal in 2008, came amid aggressive rate hikes by central banks globally but 2023 is expected to be better on positivity about overall macroeconomic trends in India, experts said.

Apart from global monetary tightening, volatile crude, rising commodity prices along with Russia and Ukraine conflict led to an exodus of foreign money in 2022.

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Going ahead, the quantum of FPI outflows might not be as large as that seen in the first half of 2022 as India's growth is relatively promising compared to other developed and emerging economies, said Manish Jeloka, Co-head of Products and Solutions, Sanctum Wealth.

Sanjiv Bajaj, Joint Chairman and MD of Bajaj Capital, said that FPI flows in 2023 would be decided by a host of factors such as the US Federal Reserve's policy stance, oil prices movement and development in geopolitical situation.

Till December 28, foreign portfolio investors (FPIs) have made a net withdrawal of Rs 1.21 lakh crore (nearly USD 16.5 billion) from the Indian equity markets and net pull out of around Rs 16,600 crore (USD 2 billion) from the debt market, as per data available with the depositories.

This was the worst year for FPIs in terms of flow and withdrawal from equities comes following a net investment in the past three preceding years.

FPIs made a net infusion of Rs 25,752 crore in equities in 2021, Rs 1.7 lakh crore in 2020, which was the best year, Rs 1.01 lakh crore in 2019.

A net outflow was last seen in 2018 (Rs 33,000 crore), while 2022 would be only the fifth year in the history of FPIs when they have been net sellers of Indian equities -- the other three being 2011 (Rs 27,000 crore), 2008 (Rs 53,000 crore) and 1998 (Rs 740 crore).

This year, most of the major central banks started normali=sing the monetary policy, which resulted in the departure of hot money from emerging markets including India. This resulted in the unprecedented rise in prices (Inflation) in most of the economies, Bajaj said.

On the domestic front too, the scenario was not encouraging. Rising inflation continued to be a cause for concern, and to tame that, RBI also hiked rates, which cast a shadow on the growth prospects of the domestic economy, said Himanshu Srivastava, Associate Director - Manager Research, Morningstar India.

Another important aspect that led to the outflows from domestic stock markets was its high valuation, compared with other relatable markets, he added.
This has also resulted in foreign investors booking profit here and shifting focus towards other markets which are attractive on the valuation and risk-reward front.

"The withdrawal of foreign portfolio equity investment was driven by lower investor risk capital and monetary tightening rather than India-specific factors," said Pradeep Gupta - Co-founder and Vice Chairman, Anand Rathi Group.

In the debt market, FPIs continued their sell-off for the third straight year with a net outflow of Rs Rs 16,600 crore in 2022. They had made a net withdrawal of Rs 10,359 crore in 2021 and of Rs 1.05 lakh crore in 2020.

FPIs have used the debt segment for parking investments from a short-term perspective in the wake of uncertainties on the equity side. Accordingly, they kept on buying intermittently in the debt segment thereby checking outflow from the segment, Morningstar India's Srivastava said.

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"Broadly, from the risk-reward perspective and with interest rates rising in the US, Indian debt doesn't appear to be an attractive investment option for foreign investors", he added.

India, on average, receives 2-3 per cent of the global cross-border portfolio equity flows. Since 2000, the current year would be only the fourth year when Indian equities would be witnessing a net outflow.

In the past, whenever there has been an outflow by foreign investors from equities, the immediate aftermath witnessed strong inflows. After outflows during 2008, 2011 and 2018, India, on an average, received USD 20 billion yearly inflow for the next couple of years, Anand Rathi Group' Gupta said.

"Going by the past examples, India is expected to receive substantial foreign portfolio equity inflows during 2023 as well," he added.

The massive selling by FPIs has been absorbed by domestic institutional investors (DIIs) including mutual funds and insurance companies. This is a reflection of the rising clout and maturity of domestic investors.

FPIs started the year 2022 on a negative note and the departure of "hot money" continued till June. In the first six months of this year, they pulled out Rs 2.17 lakh crore from equities largely due to central banks globally, and particularly US Federal Reserve ending its ultra-easy pandemic-era monetary policy.
This was followed by a series of aggressive rate hikes thereby checking the liquidity in the system.

FPIs gradually started making a comeback in the Indian markets in July with a net investment of Rs 4,989 crore and Rs 51,204 crore in the succeeding month largely because the Indian economy as well as Indian markets have been more resilient during these testing times.

However, again they withdrew money in September and minuscule amount in October. The change in stance from FPIs have been seen since last week of October as they started pouring money and the momentum continued in December too.

This positive stance could be attributed to the resilience shown by the Indian markets amidst global turmoil, besides, stabilising inflation numbers in the US raised hopes that US Fed may not go for further aggressive rate hikes.

Before withdrawing money from the equities in 2022, FPIs injected money for the preceding three years on ultra-loose monetary policy of major central banks to support their respective economies leading to a deluge of liquidity in the global financial system.

A large part of this money moved to emerging markets to chase higher yields. This was the reason for higher FPI flows in emerging markets, including India, in 2020 and 2021, Sanjiv Bajaj said.

In terms of sectors, since the FPI flows have reversed from July 2022 onwards, they have added the most in financials followed by consumption and capital goods.

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Financial Services have accounted for 26 percent of overall net inflows of Rs 85,000 crore during July-November this year, owing to improving credit demand, While demand recovery post-peaking of inflationary factors and an imminent uptick in Capex are likely reasons for the positive stance on consumption and capital goods, respectively, Sanctum Wealth's Jeloka said.

On the flip side, the FPIs have been seen lowering their positions in the information technology stocks which can be attributed to high valuations levels as well as the impact on spending due to the recessionary environment abroad, he added.

Going ahead, from the short to medium-term perspective, FPIs are expected to continue with their investments in Indian equities but in a restrained manner, Morningstar India's Srivastava said.

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