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Can Fed's hawkish stance impact FPI inflows in the Indian market ahead

FPIs have been net sellers in the Indian market for the first half of the year, however, the trend changed in July, and further, the buying emerged aggressive in the domestic equities in August despite rising bond yields and strong dollar.

In August, FPIs pumped in more than  ₹49,000 crore in the equity market -- making it the highest monthly buying so far in 2022. (iStock)Premium
In August, FPIs pumped in more than 49,000 crore in the equity market -- making it the highest monthly buying so far in 2022. (iStock)

The August month is nearing its end. For Indian equities, this month has been the most fruitful so far in the year with Sensex near the 59,000-mark and Nifty 50 around 17,700. However, one of the biggest solaces was seen in foreign portfolio investors (FPIs) who pumped in more than 49,000 crore in the equity market -- making it the highest monthly buying so far in 2022. FPIs have been net sellers in the Indian market for the first half of the year, however, the trend changed in July, and further, the buying emerged aggressive in the domestic equities in August despite rising bond yields and strong dollar. However, with September month a few days away might, it may log a reversal in FPIs' positive trend. And US Fed's hawkish stance is likely to be a mood dampener.

Data from NSDL showed that, so far in August, FPIs have infused a total of 55,031 crore in the overall Indian market (equities, debt, debt-VRR, and hybrid instruments).

From the total, foreign funds inflow in the equity market was at 49,254 crore between August 1 to August 26 --- accounting for 89.50% of the total inflows in the market. Meanwhile, inflow stood at 4,370 crore in debt, and 2,918 crore in debt-VRR. However, foreign investors were net sellers in the hybrid market to the tune of 1,510 crore during the period.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "FPIs continued to buy equities in August in spite of rise in US bond yields and rising Dollar," adding, "They were buyers in the cash market too in all days of August except three."

The strategist added, "FPIs are now buying stocks of financials, capital goods, FMCG, and telecom. The fact that FPIs are buying in India even amidst strengthening dollar is a reflection of their vote of confidence in the Indian economy."

In July month, FPIs inflow stood at 1,971 crore in the Indian market - and of which -- inflow stood at 4,989 crore in the equities.

June month has been the worst in terms of FPIs stance in the Indian market --- with outflow at 51,422 crore. During the month, the outflow was at 50,203 crore in the equities.

From January to June this year, FPIs pulled out a massive 2,17,358 crore from the equities market. However, due to buying in July and August, some outflows in the equities have been recovered. Now, overall, FPI outflow in the equity market is around 1,63,115 crore year-to-date.

Overall, FPIs have removed around 1,70,288 crore from the Indian market (including equities, debt, debt-VRR, and hybrid) year-to-date.

However, going forward, Vijaykumar added, "The ultra-hawkish stance of the Fed at Jackson Hole is a short-term negative for equity markets. This might impact FPI flows in the short-term."

Meanwhile, Manish Jeloka, Co-head of Products & Solutions, Sanctum Wealth said, "The hawkish statement by the US fed chairman has led to a risk-off environment globally as markets have started baking in higher probability of a 75-bps rate hike in Sep fed policy meeting."

In the Jackson Hole speech, US Federal Reserve chair Jay Powell stated to keep high-interest rates to fight inflation at cost of economic growth. The US dollar reached its highest level in two decades and many analysts are expecting it to strengthen further against a basket of currencies.

Also, Jeloka added, "Post Jackson hole markets will be keenly awaiting the US non-farm payroll on the 2nd of Sep followed by the US CPI numbers on the 13th of Sep. A stronger than expected non-farm payroll and inflation numbers will to further sell-off in global equities which in turn would lead to a sell-off by FPIs in Indian equities. However, a weaker than expected non-farm payroll and inflation numbers will lead to a risk on environment globally which may actually result in small FPI flows into Indian equities."

According to Mitul Shah- Head of Research at Reliance securities, the Federal Reserve continues raising interest rates and holding them at a higher level until it is confident inflation is under control and at the 2% level. Slackness in the rate of investment, spending, and hiring will be the unfortunate cost of reducing inflation. The RBI has made it clear to achieve its medium-term inflation target of 4% over the next two years.

Shah added, "The focus in the next few weeks would be on how central banks prepare to combat in the near term. The RBI’s rate-setting panel is likely to opt for slowing down the pace of hikes and increasing the repo rate by 25 bps in September. The central bank has already hiked the repo rate by 1.4% in three consecutive actions since May this year, in response to the high inflation which has been consistently breaching the upper end of the tolerance band set by the government to the RBI."

Further, Shah said that the Monsoon in India till 26th August, is ~8% above the long-term average. The fourth advance estimate of production of major agricultural crops production of wheat during FY22 is estimated at 106.84mn Tonnes. The reserves have declined in August to the lowest level for the month in 14 years, while consumer wheat inflation is running at close to 12%. India's retail inflation may be moderating after hitting a peak in April but there are some upside risks that will weigh on the RBI as it decides the course of future rate hikes.

"We expect some profit booking next week after 15-20% gain seen in last two months," Shah added for the Indian market.

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Updated: 29 Aug 2022, 08:35 PM IST
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