Why have the FIIs turned so negative on India in year 2023?

Since the start of January 2023, FPIs have been aggressive sellers. In the first 29 trading session of 2023, FPIs sold Indian equities to the tune of $4.70 bn. What has triggered this selling and what does it tell us about FPI appetite? 

FPIs turn the tables for India

Most of us remember the period from October 2021 to June 2022 as a period of persistent FPI selling. During these 9 months, the FPIs sold Indian equities to the tune of $34 billion. However, from July 2022 to December 2022, the FPIs were net buyers to the tune of $12 bn. However, things have suddenly changed for the worse in the year 2023. FPIs have turned net sellers on most of the days during 2023 and the selling has been quite sharp across the months of January and February 2023. In the first 29 days, the FPIs sold $4.70 billion.

There were some interesting trends at work. Firstly, the total FPI net selling was $3.52 billion in January and $1.18 billion in February. Out of the 29 trading sessions in 2023 so far, the FPIs have been net buyers in just 9 sessions and have been net sellers in 20 sessions. To a large extent, Indian markets are now relatively more expensive than other Asian EM nations and that is driving the portfolio flows out of India. Also, with China exiting from zero-COVID policies, the onus shifts to economies that will benefit from China’s growth. Interest is gravitating towards rest of EM Asia.

Concerns for the FPIs

There are several reasons that the FPIs are worried, apart from the other Asian economies looking more attractive. First, there has been too much hawkishness from the central banks, including RBI. That is not good news for Indian stocks as it raises the cost of funding for the Indian companies. Secondly, Q3FY23 numbers are biased in favor of banks, that are gaining from the time lag of rate transmission. However, most FPIs are up to the brim with BFSI stocks. Thirdly, India is a victim of the “Here is the profit” syndrome. FPIs have to book profits in a portfolio that has profits on the table. India was the best performing market in 2022, so here is where you have profits to book. Lastly, some of the sheen of Indian markets has gone out due to the Adani saga; a key overhang.

Are FPIs flows off for now?

That would be too drastic an inference since it is the short term triggers that are not favoring India. There are several long term triggers for FPIs to come back to Indian markets. The Union Budget has been extremely focused on capital spending and lower subsidies. Also, the decision to reduce fiscal deficit by 50 bps to 5.9% is a move that would be welcomed by the FPIs. Above all, India is the fastest growing large economy and money will gravitate to India. As India moves to $7 trillion GDP, it may be too salivating a prospect to miss out!