A cursory look at the recently concluded September quarter, tells you that FPIs have been net sellers in Indian equities to the tune of $8.75 billion. This is the net selling after factoring in IPO inflows via anchor flows and QIB flows. That means; secondary market selling by the FPIs has been a lot more intense. To an extent, the FPIs have been net buyers in Indian debt in this period, but that still pales in comparison with the volume of selling that we have seen from FPIs in equities. Are we missing the critical link?  

Needless to say, bulk of FPI selling in last quarter was triggered by concerns over Trump tariffs. There was also a sense of disappointment that the Indo-US trade deal did not fructify. The 50% tariffs imposed by the US on Indian exports are likely to impact about $50 billion of merchandise exports to US; and that is big. There are also concerns that recent 100% tariffs on formulations and hike in H1-B visa fees may hit India’s export cash cows like IT and healthcare. Also, most FPIs have made substantial gains on their India portfolio, which they are strategically monetizing. 

Another key factor that has driven FPI selling in the last quarter has been the combination of stiff valuations and the weak rupee. For instance, Indian rupee was among the weakest EM currencies, so FPIs were anyways going to lose out in dollar terms. In addition, the Buffett Ratio of the Indian markets had crossed 115% levels, which is much higher than the median of last few years. These two factors prompted a rapid shift in capital flows from India into other markets like China, Taiwan, and even South Korea, where the valuations were a lot more reasonable on a P/E basis. Limited RBI intervention also underscores that the RBI is willing to tolerate a weaker rupee. 

FPIs investing in emerging markets like India are fully aware  of the risks. They also know that these are the markets that can give them alpha to pay bills. How else do global pension funds bridge their massive old age gaps or how do FPIs earn higher amid rising yields. The pinch that India feels from FPI selling is limited today since LIC, Indian MFs, PFs, and private insurers sit on more than $2 trillion of cash. That is big enough to handle domestic market buying without relying on FPIs. But, FPIs are aware that as global economies become insular and global trade uncertain; the domestically driven economies like India will stand out. That is when, flows will be back!