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We believe the hawkish comments by the US Federal Reserve chairman at the Jackson hole symposium is an extension of the QT (quantitative tightening) cycle which began last year (CY21) and resulted in the biggest quantum of FPI outflows from India over a one-year period (US$ 33 bn for TTM period ending Jun’22 including primary inflows). The massive outflow, in anticipation of a 1960s-80s type of extreme QT cycle, was probably an overreaction which is correcting via inflows seen since July’22. Although not as extreme as originally thought, we continue to be in a QT cycle which will result in bouts of volatility from FPIs although the phase of ‘unprecedented relentless selling’ seems to be behind us. The trajectory of inflation going ahead in the US will be a key determinant of FPI flows in general towards EMs, including India. Overall FPI flows for CY22 can be clearly demarcated into the selling phase of H1CY22 and now resumption of buying in H2CY22.

Sectoral and stock level institutional flows in H1CY22 (selling phase of FPIs)

* FPI selling in H1CY22 (~US$29bn including primary flows) was largely driven by financials and IT and to a lesser extent by discretionary consumption, oil & gas and cement (Chart 5).

* Top stocks with increase in FPI holding during H1CY22 – Cipla, ITC, HAL, UPL and Power Grid (Table 8).

* Top stocks with decrease in FPI holding during H1CY22 - Tech Mahindra, HDFC, HDFC Bank, L&T Infotech and Mindtree (Table 8).

* DII buying during H1CY22 was ~US$30bn which included MF buying worth US$16.8bn across sectors with highest flows towards financials, IT, consumer discretionary, auto and oil & gas.

* Top stocks with increase in MF holding during H1CY22 – Gland Pharma, Bandhan Bank, SBI Cards, Tech Mahindra and Utratech (Table 8).

* Top stocks with decrease in MF holding during H1CY22 –BPCL, Tata Steel, Tata Consumer, IOCL and UPL (Table 8).

Sectoral level institutional flows in H2CY22 so far

* Using the final FPI flows data from NSDL, which includes primary inflows as well, inflows from FPIs stand at US$6.8bn so far in H2FY22 till 30th Aug’22.

* FPI buying in H2CY22 (till 15th Aug’22) has been driven by domestic economy sectors such as consumer discretionary, financials, industrials, FMCG and telecom (Chart 3). However, sectors driven by global factors such as oil & gas, IT and metals were sold by FPIs.

* Consequently, aggregate FPI equity assets stood at Rs47trn as of 15th Aug 2022, which translates into 17.1% holding of aggregate listed Indian equities (Rs275trn) (seeing an uptrend of 10bps from June, ‘22).

* DII and MF buying has moderated in H2FY22 to around US$700mn–US$800mn range so far (30th Aug’22).

* Inflows into MF schemes continue despite the volatility in monthly SIP (systematic investment plan) flows continuing in excess of Rs120 bn. The MF equity AUM stood at ~Rs21trn as of July’22.

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