FPI investment in Indian equities rises to $566 bn in Q2

After declining for three consecutive quarters, the value of FPI investment in Indian equities rose 8 per cent quarter-on-quarter to $566 billion in the July-September period, according to a Morningstar report on Wednesday.

A fast-changing global macroeconomic landscape, sentiments and opportunities that the Indian equity markets have to offer impacted the direction of flows by Foreign Portfolio Investors (FPIs).

Through the quarter, the value of the FPI holdings in domestic equities surged by 8 per cent to $566 billion from $523 billion recorded in the previous quarter.

Further, the value of such investment was $612 billion in the March quarter and $654 billion in the quarter ended December 2021, as per the report.

During the quarter ended September 2021, the value of FPI investments in Indian equities was $667 billion.

Consequently, foreign investors' contribution to Indian equity market capitalisation also grew marginally during the quarter under review to 16.97 per cent from 16.95 per cent for the three months ended June 2022.

Offshore mutual funds form an important component of total foreign portfolio investment, apart from other large FPIs, such as offshore insurance companies, hedge funds and sovereign wealth funds.

After fleeing from the Indian markets in the previous quarter, FPIs took a sharp U-turn during the quarter ended September 2022.

Although foreign investors started cautiously, they gradually built conviction in Indian equities.

"Expectation of rate action by the US Federal Reserve, high inflation and its impact on global economic growth, and progression of the Russia-Ukraine war were the major factors closely tracked by FPIs," the report noted.

Foreign investors started the quarter on a cautious note driven by concerns over the country's worsening current account due to rising crude prices and depreciating currency.

They, therefore, chose to book profits in Indian equities, which were trading at a premium against the other comparable markets, it added.

After being net buyers to the tune of $618 million in July and $6.44 billion in August, FPIs once again went into a selling mode in the Indian equity markets in September as they sold $903 million.

The net outflows were largely on the back of enhanced global uncertainty.

The scenario turned after an aggressive rate hike by the US Federal Reserve to control rising inflation.

Besides, there were concerns that rising interest rates could dislodge global economic growth.

Also, the sharp depreciation in the Indian rupee against the dollar and rising bond yields in the US were other detractors for foreign flows.

In recent times, particularly in November, FPIs have come back strongly to invest in Indian equities as they invested $3.53 billion so far this month.

"Hopes that the aggressive rate-hike cycle is nearing its end, better than expected macroeconomic data in the US, and lower probability of any immediate adverse impact on the US economy helped improve sentiments," the report mentioned.