Since the month of May 2020 started, the FII buying has been quite robust. While the buying has been aggressive in equities, FPIs have still been sellers in the debt segment. Of course, the extent of debt selling is much lower than what it was in the months of May and April but FPI flows into debt are still in negative territory. The table below captures the daily flow of foreign portfolio investors (FPIs) into equity and debt based on data reported by NSDL and CDSL to SEBI.
Table 1 – FPI flows in equity and debt (Rs. in crore)
Data Source: NSDL / CDSL
As can be seen from the table, there appears to be a sharp turnaround in equity buying in the current month, FPIs were net sellers in the months of March, April and May in the equities segment but have turned net buyers in June. But that does make it significant. Why are FPI flows showing a bounce and what is it that you need to be aware of with respect to FPI flows.
Betting on a rapid recovery
One thing that FPIs are doing in the equity segment is a bet on a rapid recovery in the second and third quarters of the current fiscal year. For example, most rating agencies have already factored in a negative growth in GDP of (-5%) for the fiscal year FY21. However, there is a sharp bounce expected in the third and fourth quarters of the current fiscal and that is what FPIs appear to be betting on. Also, Fitch and Moody’s have projected that the GDP growth could bounce to over 8.5% in FY22. That would mean that GDP growth would get back to the normal levels with salutary effect on earnings and corporate revenues.
A trade on the equity debt arbitrage
One factor that drives the rally in equity markets is that the P/E ratio has come down to below 20X. That means; the earnings yield (which is the inverse of the PE ratio) is now above 5%. Currently, even bond yields on the 10-year G-Secs are trending below the 6% level. For a long time, equity looked overpriced and debt yields were too attractive. FPIs realize that if they buy into India at these valuations, they get a combination of reasonable valuations and the yield advantage over debt. That can be a compelling reason for FPIs and has been driving most of the flows for equity markets.
Remember, there has been a surge in block deals
One thing that has driven the surge in FPI flows into equities is the surge in block deals. There were a number of big block deals over the last one month. First, HDFC sold a stake in HDFC Life, Standard Life sold a block in HDFC AMC, and Uday Kotak sold part of his stake in Kotak Bank. In addition, FPIs also lapped up shares of Bharti Airtel sold by the promoter group as well as Hindustan Unilever shares sold by Glaxo. All these block deals substantially added up to the equity inflows. A word of caution is that you need to really look at FPI flow outside of such block deals to get the right picture and the overall numbers may be quite misleading on that count.
There are risks to FPI flows in debt and equity
It may be too early to celebrate that FPIs have infused over Rs.20,000 crore in the first half of June. The flows are still minimal if you leave out the block deals. Yes, there is a long term story in favour of India but there are medium term risks too. For example, the fluid political situation on the Indo-China border is a major risk for FPI flows into India. Secondly, the rupee/dollar equation remains another major risk. It is only when these two risks stabilize that we could get a clearer picture of FPI flows into India.