Recap 2023, Marching into 2024 (FPI flow story)

26 Dec 2023 , 10:57 AM

ONE OF THE BEST YEARS FOR FPI FLOWS

As year 2023 comes to an end, one of the major highlights of the year has been the volume and intensity of the FPI flows. FPI flows are determined by a number of factors; both short term and long term. The table below captures the month-wise flows from FPIs in the calendar year 2023. Figures are only up to December 22, 2023, but the last week is only expected to get better for the FPI flow story.

Monthly FPI  flows in 2023	Equity Flows (₹ in crore)	Debt & Hybrids (₹ in crore)	Combined FPI Flows (₹ in crore)
January 2023	-28,852	2,309	-26,543
February 2023	-5,294	1,155	-4,139
March 2023	7,936	-2,037	5,899
April 2023	11,631	1,915	13,546
May 2023	43,838	4,492	48,330
June 2023	47,148	9,109	56,257
July 2023	46,618	1,359	47,977
August 2023	12,262	6,076	18,338
September 2023	-14,768	956	-13,812
October 2023	-24,548	6,673	-17,875
November 2023	9,001	15,545	24,546
December 2023 #	57,313	20,075	77,388
Total for year 2023	1,62,285	67,627	2,29,912

Data Source: NSDL (# upto December 22, 2023)

Here are some of the key takeaways from the FPI flow story for the calendar year 2023 till date and what it means for the overall FPI flow picture.

• In terms of equity flows, total net FPI flows in 2023 stood at Rs1,62,285 crore with December already the best month in 2023. Out of the 12 months of calendar 2023, 4 months saw negative flows into equities and 8 months saw positive flows. In four out of these twelve months, the net FPI equity flows were above Rs40,000 crore.

   

• Debt flows at Rs67,627 crore was among the best in recent memory. FPIs were net buyers in debt for 11 out of the 12 months, with only March seeing FPI selling after the RBI had implemented its last rate hike in February. November and December accounted for more than 50% of the full year net flows into debt.

   

• If you look at the overall FPI flows till date in 2023, it has been an impressive year at Rs2,29,912 of combined net inflows from FPIs into equity and debt. On an overall basis, FPIs were net sellers in 4 out of these 12 months and net buyers in the remaining 8 months. 

Clearly, year 2023 has been a year when FPIs have shown a sharp divergence from the trend of the last couple of years since the digital IPO boom. With rates looking all set to peak out in India and in the US markets, it looks like risk-on investing by FPIs is back in full earnest.

HOW DID FPI FLOWS PAN OUT IN THE LAST 25 YEARS

Having looked at the last one year, we take a longer term perspective and look at how FPI flows into equity and debt panned out over the last 25 years since FY2000. The table below looks at financial year instead of calendar year, since that is the real benchmark in India and instead of rupees, these figures are evaluated in dollars to make them comparable across a much longer time frame.

Fiscal Year FPI  flows FY00-FY24	Equity Flows ($ in million)	Debt & Hybrids ($ in million)	Combined FPI Flows ($ in million)
FY1999-00	2,356	117	2,473
FY2000-01	2,222	-62	2,160
FY2001-02	1,696	144	1,840
FY2002-03	528	37	565
FY2003-04	8,752	1,254	10,006
FY2004-05	9,940	412	10,352
FY2005-06	10,999	-1,635	9,364
FY2006-07	5,589	1,232	6,821
FY2007-08	13,242	3,199	16,441
FY2008-09	-10,324	486	-9,838
FY2009-10	6,746	4,387	11,133
FY2010-11	24,295	7,932	32,227
FY2011-12	9,012	9,911	18,923
FY2012-13	25,833	5,214	31,047
FY2013-14	13,441	-4,566	8,875
FY2014-15	18,370	27,328	45,699
FY2015-16	-2,008	-515	-2,523
FY2016-17	8,467	-867	7,600
FY2017-18	3,960	18,505	22,465
FY2018-19	123	-5,622	-5,499
FY2019-20	1,291	-4,332	-3,041
FY2020-21	37,028	-848	36,180
FY2021-22	-18,468	2,451	-16,017
FY2022-23	-5,114	-396	-5,510
FY2023-24 *	22,884	7,983	30,867
Total FPI flows till date	1,99,772	71,735	2,71,508

Data Source: NSDL (# upto December 22, 2023)

Here are some of the key takeaways from the FPI flows data for the last 25 years. 

• If you look at equity flows over the last 25 years, then FPIs have been net buyers in 4 financial years and net buyers in the remaining 21 years. Other than crisis years, FPIs have been net buyers in Indian equities in all the other years.

   

• What about FPI flows into debt. FPIs have been net sellers in debt in 9 out of the last 25 years. However, in 6 out of these 9 years, FPIs were only marginal sellers in debt. Typically, debt selling is driven by more short term factors like interest rate differential, currency weakness etc.

   

• What about the overall situation? On an overall basis, FPIs were net sellers in 6 out of the 25 years. However, the last two fiscal years of FY22 and FY23 were years that saw net selling by FPIs, largely due to the persistent spike in interest rates globally, which forced the foreign portfolio investors to turn risk-off.

   

• How does FY24 compare with previous years. In terms of equity flows, the total inflows of $22.88 billion is way below the $37.03 billion infused in FY21. The FY24 figure is also lower than the equity inflows in FY11 and FY13. However, there are still 3 more months to go and so equity flows have the room to play catch up. What about debt flows? At $7.98 billion in FY24, it is nowhere close to the $27.33 billion inflows into debt in FY15 or $18.51 billion in FY18. However, a clearer picture will emerge by end of March 2024.

   

• Finally let us look at overall FPI flows. At $30.87 billion in FY24, the total flows are still lower than the overall flows seen in FY21 and FY15. But again, we still have 3 months to go in FY24, so the picture could still change by FY24. 

The moral of the story is that year 2023 in general and FY24 in particular has been a great positive year for FPI flows, after 2 years of tepid sentiments. Let us now turn to what was so special about 2023 that it led to a shift in FPI sentiments.

What influenced FPI flows in year 2023

Broadly, there were several factors that actually influenced the FPI inflows into Indian markets in the year 2023. Some of the factors were local, but some were also global, which resulted in a more risk-off environment for FPIs.

• The RBI managed a soft landing of the Indian economy, contrary to the general perception among the sceptics. Most economists and analysts were concerned that in the enthusiasm to control inflation, the growth story may be hampered. RBI made its move to stop rate hikes in February and that largely changed FPI sentiments about India. That also reduced the pressure of margins and eliminated solvency concerns about Indian companies.

   

• Robust GDP growth was a key factor in encouraging FPI flows into India. For example, India reported 7.8% GDP growth in Q1 and 7.6% in Q2. Both the GDP readings were much better than market expectations. This also led to the RBI upgrading the GDP estimate for FY24 by 50 bps. Interestingly, despite maintaining the rates static since February 2023, inflation has remained subdued, despite interim volatility. At the same time, India remains the fastest growing economy for the second year in a row.

   

• The third big factor that influenced the surge of FPI flows in the year was the US Fed finally turning dovish towards the end of the year. After taking a hawkish stand all along, the US Federal Reserve finally started giving guidance on rate cuts. Now, the Fed has guided for 3 rate cuts in 2024 and 4 rate cuts in 2025, which is much higher than what it had indicated originally. However, the CME Fedwatch expects the full 175 bps of rate cuts to happen in 2024 itself. What really made the difference was the Fed taking a more dovish tone and almost calling the end of rate hikes.

   

• Finally, there was the big FOMO (fear of missing out) factor for FPIs. During the year, FPIs learnt the hard way that domestic flows in India were robust enough to support the Indian markets for a long time. LIC and domestic mutual funds manage close to $1 trillion and that is big enough to influence the market direction. In the process, the FPIs were missing out on the cream of the rally. That is where FOMO has set in.

Year 2023 was a year of revelation as FPIs finally that it was riskier to stay away from Indian markets than to stay invested. That is likely to influence the FPI show in 2024 also.

What will influence FPI flows in 2024

FPI flows in 2024 are likely to be Influenced by 3 broad factors.

• With the Fed now guiding for dovishness, the risk of Fed turning hawkish again is almost out of the way. The question is whether the Fed uses the lower than expected PCE inflation to fine tune its dovish stance. For example, with low PCE inflation, will the RBI intensify its rate cuts. Also, will the Fed prefer to front-end the rate cuts, just as it did to rate hikes. The more the Fed inclines towards an easy monetary policy, the more FPIs are likely to veer towards EMs like India.

   

• Corporate bottom lines will hold the key, but so will the top line. The profits last year came largely from lower commodity prices and working capital tweaks. That is more or less over. Most of the profits in the coming year would have to come from top line growth and the companies maintaining margins. For top line growth, there are two areas that will be closely watched. The export sector, which was tepid for the last one year, is expected to see revival in goods and services as US demand picks up in sync with higher GDP growth. The second is the pick-up in rural demand, which has strong externalities for several Indian industries.

   

• But, beyond these factors, the one fundamental factor that will impress FPIs is how well India transforms to the next stage of growth. FPIs are betting that Indian economy will grow from $3.5 trillion to $5 trillion  in the next 6-7 years, largely on the strength of the manufacturing sector, revival in services, as well as emerging as an alternative to China. That is the big story, the FPIs will not want to miss out on.

Year 2024 is likely to be a crucial year for FPI flows. Debt may still be attractive, but if the Indian efforts on PLI, Make in India and self-sufficiency work out, then it could be a game changer for FPI flows into Indian equity. One final word. FPIs till date have infused net amount of $200 billion into India till date. Even assuming that the money they have repatriated back to their home country, the FPI equity stock in India is worth $724 billion. That is a lot of wealth created in India and that is the story that FPIs will be building on in 2024.