FII inflows dip over 80% in 2021; here's what brokerages say for 2022

Foreign institutional investors (FIIs) turned cautious in the last quarter of 2021 on expectations of the faster tapering from the US Fed next year amid lofty valuations and state elections in the New Year.

As a result, overseas investors are set to close the year with an inflow of around Rs 26,000 crore, down 84 per cent, against Rs 1,70,260 crore in 2020. This is the worst flows since calendar 2018 when FIIs offloaded shares worth Rs 32,628 crore. Global investors have sold shares of over Rs 35,000 during October 1-December 28.

Analysts hold mixed views on the inflows of FIIs going ahead. Sunil Nyati, managing director, Swastika Investmart said that the domestic equity market outperformed many emerging markets by a big margin and there was valuations concern in some pockets therefore global investors were selling in the recent past.

“They have already sold a lot and the overall outlook of the domestic equity market is very bullish therefore FIIs will again start to buy soon in our market. Generally, they start to come back to the Indian market after the 15th of January of the New Year,” said Nyati.

The benchmark BSE Sensex has gained over 20 per cent on a year-to-date basis till December 28, while the BSE Midcap and BSE Smallcap indices have gained 37 per cent and 60 per cent, respectively, during the same period.

Deepak Jasani, head of retail research, HDFC Securities said that flows in 2022 could be lower than that in 2021 due to concerns over global growth, interest rate hikes and liquidity tightening.

However, Neeraj Chadawar, head-quantitative equity research, Axis Securities said added that the short-term direction of the flows will depend upon the level of tapering in the US market.

“Based on the positive economic outlook for the country and the expectation of double-digit corporate earnings, the participation from the FIIs is likely to increase going forward, as the economic conditions are emerging positive, with the pace of vaccination drive,” said Chadawar.

Vikas Singhania, director, TradeSmart said, “FII flows are likely to remain negative or mildly positive till tapering is over. FII inflows can increase if valuations in India become compelling as compared to its peers.”

Shyamsunder Bhat, CIO, Exide Life Insurance said, “The recent outflows were expected considering the 70 per cent premium to emerging markets (historical average is a 40 per cent premium) which the Indian equity market had risen to, after the significant outperformance this year.”

FIIs generally tend to re-allocate a part of their investments from a market that appears expensive to other markets which have underperformed or which could be offering higher upsides.

“Several individual stocks having posted bigger corrections in the recent past and now offering long-term upside potential, we could see a resumption in FII inflows in the New Year,” Bhat added.

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