FII | US Fed: Are FIIs predicting the peak of US Fed’s quantitative tightening cycle?

Much before the US Federal Reserve started its aggressive interest rate hikes and balance sheet reduction in May this year, the flow of FIIs on Dalal Street turned negative in October 2021. Till June, the foreigners’ club sold Indian equities worth an unprecedented $33 billion.

July onwards, FII flows towards India and other emerging markets (EMs) started to turn largely positive with bouts of moderate selling. “The above behaviour could be again signalling that the aggressive rate hikes by the US Fed may be approaching its peak going ahead (terminal rate of 4.5-5%),”

analysts Vinod Karki and Niraj Karnani said in a research report.

However, incremental sharp outflows from EMs like India going ahead could indicate that the current expectation of a terminal interest rate of 4.5-5% for the US will be breached on the upside going forward and remains a key risk, the analysts said.

FII ownership in Indian equities stood at Rs 46 trillion as of September-end, a 17% holding of aggregate listed Indian equities.

Cushioning the downfall in the Indian market are domestic flows augmented by the ETF revolution in India. “Equity ETF AUM in September 2022 stood at Rs 3.7 trillion compared to the aggregate equity-oriented AUM of mutual funds at Rs15.8 trillion (excluding ETFs and hybrid funds). Equity ETF AUM has risen 25x since FY16 driven by a low base and rapid growth while equity-oriented AUM of mutual funds has grown 4.5x since FY16,” the report said.