Foreign Portfolio Investment

Foreign Portfolio Investment (FPI) Inflow in India in 2022

FPI Inflow

Foreign Portfolio Investment (FPI) in India showcased two distinct trends in the year 2022. Despite macroeconomic concerns, rising interest rates, and geopolitical concerns, India bagged FPI inflows in 2022. The first half of the year witnessed an aggressive sell-off whereas the second half of the year witnessed, high returns to the Indian market. In the first half of 2022, the FPIs offloaded Indian equities and bonds worth INR 2.32 lakh crore. By the beginning of October 2021, the sell-off began and the foreign investors anticipated that the US Federal Reserve would embark on a quantitative tightening cycle. The sell-off continued till June 2022 and India’s benchmark indices such as Nifty50 and the Sensex fell between 10.4% to 10.5%. Thereafter, when the US Federal Reserve tripled its rates, the FPI inflow started.

The US Federal Reserve hiking the rates resulted in the FPI inflows and a drastic reduction in sell-off in India. The FPI inflow started exactly mid-year, i.e. from July 2022 onwards. The rise in FPI inflows in India could be due to the aggressive rate hike by the US Federal Reserve.

How the trend of FPI reversed in the second half of the year?

Even before the U.S. Federal rate hike, the FPI inflows had gained momentum in India. As per National Securities Depository Limited, the Indian equities and bonds witnessed a net FPI inflow of INR 92,763 crore between July to November. This increase in FPI inflow was witnessed due to the Russia-Ukraine war which resulted in foreign investors shifting to India or other emerging economies. Due to the Russia-Ukraine war the Financial Institutional Investors (FIIs), started pouring their money into sectors such as banks and consumption stocks which were immune from global shocks. Most investors choose India because its traction is apparent in terms of India’s credit growth and consumer spending. The FPIs inflows in India are inclined toward financial services. Out of the net equity investments of INR 36,238 crore in November 2022, INR 14,205 crore was in the financial services sector. By the end of November 2022, FPIs inflow in the financial sector was worth INR 16.35 lakh crore out of the total of INR 53.98 lakh crore. In December 2022, FPI inflow was reported to be INR 11,119 crore in equities. This was the third biggest monthly buying in 2022 in Indian equities. The FPI Inflows in India in the year 2022 have been highlighted in a tabular form below:

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Calendar Year 2022INR Crores 
January– 333035194-21141697-28526

The year 2022 ended with Sensex and Nifty 50 at a positive stage. In December 2022, the Sensex touched 63.583.07 and the Nifty 50 at 18,887.60 which were record-breaking.

What could be the Indian regulatory factor which led to negative FPI in the first half of 2022?

In January 2022, the Securities Exchange Board of India introduced the T+1 settlement cycle on an optional basis. This settlement cycle shortened the settlement cycle from T+2 to T+1. As per the circular, this scheme was optional and the stock exchange could choose to offer a T+1 settlement cycle after giving advance notice. The objective of SEBI behind this initiative was to reduce the settlement risk in the market. The FPIs were not in favor of this scheme. Due to the difference in time zones. Investors in major jurisdictions effectively get two days to settle their trade in India. Reducing the timeline to one day would lead to operational challenges for FPIs for local and global custodians. Even though FPI stakeholders filed representations to SEBI and Indian Government but this could be a reason which could have led to reduced FPI inflows in India apart from other worldwide concerns pertaining to the securities market. 

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What could be the Indian Regulatory factor which led to FPI inflows in the second half of 2022?

  1. RBI provided certain relaxations on FPI investment in Indian Bonds

The RBI has provided an exception to the rule that no FPIs can borrow funds in India. RBI allowed borrowing funds from Indian Banks (Authorized Dealer Category I Banks) to place margins with Clearing Corporations on India Limited to transact in Central and State Government Securities. In addition to this, the FPI investment limit in Indian bonds has been increased. 

2. SEBI allowed Indian Investment Manager entities to be constituents of FPIs

Earlier SEBI did not allow the resident Indians to make investments in funds or entities outside India which in turn were invested into India. Such transactions were looked down and were considered round-tripping transactions for the purpose of tax evasion and avoidance. However, in 2019, SEBI (FPI) Regulations permitted resident Individuals to invest in FPI under the Liberalized Remittance Scheme (LRS) subject to certain conditions. This change was brought about because Indian-based Investment Management entities were unable to contribute capital in offshore funds which could be managed by the entities in India. Therefore, SEBI allowed investment management entities based in India to invest in FPIs. Investment in FPIs is subject to the following conditions:

  1. The Investment Manager Entity should qualify as an eligible fund manager of FPI as per the Income Tax Act[1]; and
  2. The FPI should qualify as an eligible investment fund as per the income tax act and should have obtained specific approval from CBDT for this purpose.
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This relaxation by SEBI is a positive move that could have encouraged FPI inflows in India.


As discussed above, FPI inflow in India in 2022 shows a completely different graph in the first from second half of the year. A number of factors such as securities market conditions, geopolitical conditions existing worldwide, and the Indian regulatory framework contributed to such a flip in FPI in India in 2022. In 2023, India might again experience unstable FPIs due to the economic and financial conditions worldwide despite the fact that the Indian government is taking several efforts to attract FPIs and facilitate ease of doing business in India.

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