Thread by @vikas_bazaz

Capital flows is one of the major indicators to look at, for INR movement. Higher the inflows, better it is for INR and vice versa.

But along with inflows, it is also important to see the quality and stickiness of flows.

Since India is a net importer country, meaning imports more than export, (thanks to large share of oil in import basket), it needs to meet its shortfall through capital flows.

A country gets the flows mainly through 3 sources:

1) Equity
2) Debt and
3) FDI

Since the time FPIs have been allowed to invest in Indian equities and debt their total investment has been $272 billion, out of which lion's share has gone to equities - $208 billion and rest $64 billion in debt.

However at the same time, FDI total flows since beginning has been huge $529 bln.

In FY21, India got the record gross inflows of $81 bln.

Now comes the quality of flows. Of the 3 main sources, the best and most sticky flow is through FDI channel, followed by equity and then debt.

FDI is the stickiest because it mainly goes into setting up manufacturing plants, technology transfer and job creation etc.

For example - when a foreign co. set up a plant in India, it comes under FDI. You cannot pull out of a plant overnight.

At the other extreme is debt. Investment in debt is the least sticky, as it is mainly driven by yield, and is normally referred as hot money.

Equity flows is somewhere in between FDI and debt, with a small part hot money, but a large part sticky.

Sticky because it is also driven by India growth story and company own fundamentals.

For INR watchers, equity flows is the most important given its large and volatile nature, in terms of annual variation.

It has direct correlation with how local equities performing. If local equities does well, flows remain stable and healthy.

However, outflows are normally seen when there is large global sell-off in equities or domestic fundamentals looks dismal, meaning India story sounds doubtful.