Foreign funds flow turns positive in July after 10 months. Have outflows bottomed out?

FIIs’ sector positioning till June 2022 showed them to be most overweight on energy. (File photo)

The evolving dynamics of foreign institutions invested in Indian equities is sending out confusing signals.

The FIIs pulled out over $29 billion in the last 10 months of sustained selling of Indian equities. But, the tide turned in July, with the foreign investors turning net buyers.

Are FII outflows bottoming out? When read along with other signals on FII sentiment towards emerging markets, it could indicate that, according to a BofA report. 

India saw heavy outflows second only to Taiwan (among emerging markets), while Brazil led inflows ($10 billion) so far in calendar year 2022.

"EM funds have trimmed their allocation to India - 18.1 percent against 19.6 percent in January 2021 peak - while allocations towards China have increased to 39.4 percent from 35 percent in May 2022 - on a month-on-month basis, as allocation across other EMs (excluding China) decreased, leading to an overall AUM reduction by 4 percent. India's ow position within EM funds is currently near multi-year lows (0.16 percent vs 0.66 percent in November 2020),” the report said.

“With inflows picking up this month, this could indicate bottoming out,” it said.

Also read: Will the increased EPFO allocation help offset FII outflows?

In June 2022, FII outflows touched a nine-month high of $6.4 billion because of rising global bank rates, rupee depreciation, expensive valuations and geopolitical risks, according to the report. FII ownership of NSE500 companies was at 19 percent, which was below Covid levels. 

DII inflows remain “robust” despite slowing down month on month, falling 17 percent from May level to $3.4 billion, which is the lowest in 2022. 

Sectoral Deployment

In the month-on-month assessment of FII flows, the report said that outflows dominated every sector, except industrials that attracted funds worth $114 million.

“Outflows were highest for financials ($ 1.7 billion) followed by energy ($1.3 billion), disc. ($ 1.1 billion) and IT ($786 million), largely driven by front-ended rate hikes by global central banks, INR depreciation and expensive valuations,” according to the report. 

Also read: FII flows may not pick in the near term: MOSL's Raamdeo Agrawal

FIIs’ sector positioning till June 2022 showed them to be most overweight on energy, and to have increased their overweight positions in discretionary, and to have reduced their overweight positions in financials. FIIs remained underweight on materials, utilities and industrials, and reduced their underweight positions in staples.