Weekly Musings – FPI flows for week ended August 04, 2023

5 Aug 2023 , 06:51 PM

The first signs of a slowdown in FPI flows were already there in the previous week. In fact, in the week to July 28, 2023, the FPI flows into Indian equities had tapered to its slowest pace at just $191 million. However, in the latest week to August 04, 2023 the FPI flows have dipped into the negative at ($95 million). This was one of the lowest weeks for FPI flows in the last 3 months, and the first time in 3 months that FPI flows had dipped into negative territory in any single week. 

Even these limited flows were largely driven by IPO flows with secondary markets seeing outflows for the second week in succession. However, debt flows were positive. But, why did flows dip into negative in the latest week? It could even be an exception to the trend, so we must not take it too seriously. But, apparently, issues like Fed hawkishness, India valuations versus Asian peers and the concerns over a US rating downgrade by Fitch have all been instrumental in triggering negative FPI flows in the latest week to August 04, 2023. Also, the 20,000 level continues to be a resistance for the Nifty.

Longer term perspective still looks very encouraging

However, from a slightly longer perspective, July was the third month in a row when FPI flows were in excess of $5 billion. After infusing more than $11 billion into Indian equities in the months of May and June 2023, the FPIs have infused another $5.68 billion in the month of July 2023. With total net inflows of nearly $17 billion in the last 3 months, nearly half of the outflows for the period October 2021 and June 2022 have been recouped. Also, the net outcome is that, for the calendar year 2023 so far, FPIs have turned net buyers in Indian equities to the tune of $15 billion. It is the latter that is gradually building heft and likely to further scale up in the coming months. 

What explains 3 months of FPI enthusiasm on Indian equities?

A combination of fundamental and technical factors contributed to a sharp spike in FPI flows. At a broad macro level, FPIs are betting on a domestic oriented consumer driven economy. We are talking of an economy that is going to transition from a $3.5 trillion GDP economy to a $5 trillion economy over next 5-6 years. That is going to result in a lot of purchasing power creation and translate into a lot of demand as a proxy for the growth in the Indian economy. This period is also likely to see the per capital income spike from $2,400 to close to $4,000, releasing immense purchasing power. Secondly, Fed appears to be either very close to or at the very peak of rate. It is shifting its focus from managing inflation to ensuring that the growth slowdown does not become a full-fledged recession. Not only is the topping of rates positive for debt flows; but it also reduces the average cost of capital and thus boosts equity valuations. That has been favourable for equity and debt markets in India.

The domestic story has some more positives at this juncture. While inflation has shown short term concerns over food prices, the IIP has shown a sharp pick-up, led by manufacturing. Also, the latest core sector growth at 8.2%, with a sharp growth in the infrastructure driven sectors, underlines the possibility of a multiplier effect. A lot will not depend on how the inflation is managed in India. FPI flows have also been helped along the way by expectations of a sharply lower current account deficit (CAD). In absolute terms, India may still be running the largest current account deficit among emerging markets, but it looks a lot more manageable now. The recent downgrade of the US debt by Fitch could have negative implications, but these are early days and we have to see how it evolves.

Macro FPI flow picture up to August 04, 2023

The table captures monthly FPI flows into equity and debt for 2022 and 2023.

Calendar  Month	FPI Flows Secondary	FPI Flows Primary	FPI Flows Equity	FPI Flows Debt/Hybrid	Overall FPI Flows
Calendar 2022	(146,048.38)	24,608.94	(121,439.44)	(11,375.78)	(132,815.22)
Jan-2023	(29,043.32)	191.30	(28,852.02)	2,308.27	(26,543.75)
Feb-2023	(5,583.16)	288.85	(5,294.31)	1,155.19	(4,139.12)
Mar-2023	7,109.65	825.98	7,935.63	-2,036.42	5,899.21
Apr-2023	9,792.47	1,838.35	11,630.82	1,913.97	13,544.79
May-2023	38,093.11	5,745.00	43,838.11	4,491.44	48,329.55
Jun-2023	45,736.71	1,411.63	47,148.34	9,109.36	56,257.70
Jul-2023	37,292.82	9,324.94	46,617.76	1,359.32	47,977.08
Aug-2023 #	-2,218.50	184.77	-2,033.73	1,624.69	-409.04
Total for 2023	1,01,179.78	19,810.82	1,20,990.60	19,925.82	1,40,916.42
# – August Data is up to 04th August

Data Source: NSDL (all figures are Rupees in crore). Negative figures in brackets

We now have FPI flow data for the first 7 months of calendar year 2023 plus the first few days of August. FPIs are clearly and decisively buyers in equity, although the enthusiasm in the last two weeks appears to have waned with negative flows in the latest week to August 04, 2023. However, that is more of some degree of ennui at higher levels. In the last 90 days, the FPIs infused nearly $17 billion into Indian equities and close $2 billion into Indian debt. FPIs have now infused Rs1.21 trillion into equities in calendar 2023 so far and if you add up equity and debt, the total FPI infusion has been to the tune of Rs1.41 trillion. Debt flows continue to be volatile, but the equity story is tilted towards inflows into India. (Live equity action on markets page). Here are the key triggers for robust FPI flows.

• After a long gap, the US economy has hinted at some bright spots for FPI flows into India. The statement in the previous week was positive, despite the 25 bps rate hike by the US Fed. The language did indicate that the Fed may prefer to hold the rates for longer at current levels rather than hike rates further. In short, the Fed may be done and dusted with rate hikes. The first advance estimates for US GDP for Q2-2023 has come in higher at 2.4%; which is higher than Q1 and also higher than the street estimates for Q2. Thirdly, PCE inflation (a critical input for rate decisions by the Federal Reserve) fell sharply in June to just 3% while core PCE inflation fell to 4%. These 3 factors have given some breathing room for Indian markets and a hope that hawkishness may end soon.

   

• Q1FY24 results so far have been better than expected in India. While IT sector may have been a disappointment in terms of guidance, sectors like financials, autos, FMCG, and capital goods have given a robust performance. Overall, 58% of the results announced till date for Q1FY24 have given positive profit growth.

   

• As India celebrates 3 months of persistent FPI flows aggregating to nearly $17 billion, the latest concern is on the downgrade front. On August 01, 2023, Fitch downgraded US debt ratings a notch from AAA to AA+. These are still early days, but some impact is expected on emerging markets, which could see risk-off flows. 

One thing is certain that the FPIs appear to have strongly bought into the India story and it looks very likely that the positive trend may continue.

Colour of daily FPI equity flows for last 4 rolling weeks

Each week we look at the last 4 rolling weeks data on FPI flows as it shows us a time series moving average of FPI flows. Check the table below for 4 weeks to August 04, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
10-Jul-23	870.68	870.68	105.31	105.31
11-Jul-23	1,059.33	1,930.01	128.20	233.51
12-Jul-23	1,469.15	3,399.16	178.40	411.91
13-Jul-23	-333.60	3,065.56	-40.55	371.36
14-Jul-23	5,650.65	8,716.21	688.10	1,059.46
17-Jul-23	3,278.87	11,995.08	399.37	1,458.83
18-Jul-23	504.66	12,499.74	61.43	1,520.26
19-Jul-23	2,527.61	15,027.35	308.06	1,828.32
20-Jul-23	2,193.99	17,221.34	267.23	2,095.55
21-Jul-23	4,638.87	21,860.21	565.41	2,660.96
24-Jul-23	-1,405.07	20,455.14	-171.30	2,489.66
25-Jul-23	230.51	20,685.65	28.14	2,517.80
26-Jul-23	2,854.80	23,540.45	348.96	2,866.76
27-Jul-23	1,130.96	24,671.41	137.94	3,004.70
28-Jul-23	-1,249.82	23,421.59	-152.43	2,852.27
31-Jul-23	1,252.35	24,673.94	152.27	3,004.54
01-Aug-23	-774.18	23,899.76	-94.13	2,910.41
02-Aug-23	25.65	23,925.41	3.12	2,913.53
03-Aug-23	-1,501.84	22,423.57	-181.96	2,731.57
04-Aug-23	216.64	22,640.21	26.19	2,757.76

Data Source: NSDL

The week to August 04, 2023 saw FPI outflows of $95 million with FPIs net sellers in a week for the first time in the last 3 months. However, this could be more due to tiring of markets at higher levels. Based on the 4 weeks of rolling FPI flows into equities, here are some interesting inferences.

• In the previous 3 rolling weeks, FPI infusion into Indian equities has been $1,059 million, $1,602 million, and $191 million. The latest week saw net FPI outflows of ($95 million). However, it is just the first week of net welling and too small to call a trend.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total FPI flows into Indian equities were Rs22,640 crore or $2.76 billion. In the last 20 trading sessions, there have been 15 days of net buying and 5 days of net selling.

The FPI flows have been robust in the last 3 months and August has started off in a tepid fashion. What happens from here on assumes a lot of importance.

How will FPIs place their bets at current levels?

FPIs are likely to focus on 5 major data points to take a decision on how to address the India flow issue.

• With the FOMC July meeting hinting at a peaking of rates, FPIs will be watching for rate action in the September meeting and for inflation data in the US markets.

   

• The recent credit rating downgrade of the US economy by Fitch may look like noise, but it still has a larger import for India in terms of risk-off flows and the cost of funds for countries with India, which are just at the border of investment grade.

   

• The results season is almost half-way through and the winners are the standard domestically driven sectors like banking, financials, capital goods and FMCG. FPIs would continue to look at play on domestic demand and domestic market expansion stories.

   

• FPIs have been impressed by the commitment that the government has shown towards the reforms process with initiatives like defence in-sourcing, make in India, capital spending, PLI scheme for key sectors etc. That will assume additional importance in the light of the slew of state elections and the general elections coming up in 2024.

   

• FPIs will be watching the global oil prices and the Indian rupee closely. Brent crude has spiked to $86.15/bbl on supply concerns while the USDINR has weakened to Rs82.75/$. FPIs would be wary of a sharp spike in oil and any sharp fall in the rupee value.

For now, the FPIs stay positive on financials, capital goods, autos and FMCG; all domestic plays. FPIs are wary of IT and healthcare; as they remain global plays. FPI flows may slow, but the bets on the domestically driven sectors is likely to continue.