Why have FPIs turned net buyers in July 2022 after several months of consistent FPI selling?

The numbers are not yet big or decisive but after a long time, FPIs have been net buyers in Indian equities at the end of 3 weeks of the month. This comes after nearly 9 consistent months of selling in which nearly $35 billion of FPI money flowed out of India. For the month of July till 22nd, total net inflow from FPIs into equities was Rs1,099 crore. Ironically, between 01st July and 15th July, FPIs saw equity market outflows of Rs7,432 crore. However, the tide turned with FPIs buying equities worth Rs8,531 crore in the third week.

One can safely say that the week from 18th of July to 22nd of July was perhaps one of the most fruitful for the equity markets with strong buying from the global investors. However, the risk is that this could be triggered by rupee arbitrage on expectations that it could give a temporary bounce from the 80/$ levels. It may be recollected that FPIs had pulled out Rs50,203 crore from equities in June 2022. In Q1FY23, they had pulled out Rs107,340 crore from Indian equities while for calendar 2022 till date, they pulled out Rs217,358 crore.

However, it is still early to jump the gun and say that the wind direction has changed. It may not be the case and this could just be an aberration. However, it does look like the relentless selling has come to halt. For now, the bulk of the buying is coming in financials followed by IT. These were also the two sectors that saw the biggest selling during the FPI sell-off during the last nine months. This selling by FPIs in IT stocks was largely on the back of concerns over thinning operating margins and rising attrition levels.

There are a few key factors that could determine the course of the rupee in coming weeks. If the Fed opts for 100 bps rate hike instead of 75 bps, then dollar inde will strengthen and we could see safe haven money rushing out of India into safer assets. Also the levels of current account deficit and the colour of corporate results will have a bearing on the FPI selling in the coming weeks. FPIs would be wary of high CAD of more than 5% of GDP, while they would prefer to see supply push inflation reducing. FPI risks are still there.