FPIs 9-mth fire sale over, turn net buyers in July

Foreign portfolio investors (FPIs) have turned net buyers for the first time in CY22, buying equities worth ₹4,989 crore ($618 million) in July.

The turnaround follows nine months of consecutive selling since October 2021 that saw the FPIs dump ₹2,50,890 crore ($33.75 billion) worth of equities, as the U.S. Fed went on a rate hike spree even as high inflationary pressure on the back of high crude oil prices punctured India’s GDP growth estimates. Incidentally, the six-month fire sale was four times the equity selloff (₹52,987 crore) witnessed in CY08 during the financial crisis.

The benchmark indices also ended with a bang on the last trading day of July with the Sensex gaining 1.25% (712 points) at 57,570 and the Nifty 1.35% (225 points) at 17,158. In fact, as per a report by IIFL, based on the seasonality trend of the last 20 years, the Nifty has never seen more than three straight months of negative returns. April, May and June were negative, and July was expected to close in the green.

The record decline of 7% year-till-date in the local currency (79.25) versus the dollar coupled with relatively attractive valuations could have prompted the change in FPI sentiment. The Nifty is now trading at 17x one year forward consensus, which is close to the 10-year average. After the first quarter season ends, any cuts in earnings estimates, will further contract the multiples. Though inflation is expected to hit India Inc. in Q1, thus far, the results of 628 listed companies, as per CMIE, have shown a cumulative 34.67% jump in net sales and 33.53% surge in net profit.

Even as FPIs had turned net sellers, domestic mutual funds had absorbed the selling by pumping in close to $25 billion into equities year till date. In fact, according to Morgan Stanley, domestic investors are now larger holders than FPIs for the first time since 2010 as their ownership stands at 25.6% in India's largest 75 companies.

With the U.S. Fed hiking rates by 75 bps on July 27, and the concurrent narrative that the central bank would look at month-on-month data to see which way the inflationary wind is blowing, seems to have been taken as a positive by the U.S. and global markets. For now, the view is that the Fed is unlikely to be hawkish about rate increases as it has already administered a 225 basis points hike in interest rates, which is now in the 2.25-2.50% range. But a lot will depend on whether the four-decade-old inflation in the U.S. falls below 9% or stays firm.