Weekly Musings – FPI flows for week ended August 11, 2023

14 Aug 2023 , 09:51 AM

The first signs of a slowdown in FPI flows were already there in the last 2 weeks. In fact, in the previous week to August 04, 2023, the FPI flows had dipped into the negative zone. In comparison, the FPI flows into Indian equities in the week to August 11, 2023 was in the positive at $641 million. It may not be as impressive as the earlier months, but it is still much better than the previous two weeks, although it may be too early to say with confidence that the slowdown in FPI flows are a thing of the past. 

Why did FPI flows into India slow down?

There were several reason for the overall FPI flows slowing in the last few weeks. Here are a few key reasons for the same. 

• One of the key reasons for the weakness in FPI flows stems from Fitch deciding to downgrade the US debt by a notch from AAA to AA+. More than impacting the US markets, it has impacted emerging markets like India, which still rely heavily on risk-on flows. 

   

• The second reason for the weakness in flows in the last few weeks is the Nifty struggling to cross above the 20,000 mark. In the last few weeks, the resistance of the Nifty has been getting progressively lower. First, the Nifty struggled at 20,000, then at 19,800 and then at 19,500. That has also dented the enthusiasm of FPIs to some extent.

   

• FPIs have been concerned about rising inflation in India. In the month of June, inflation went up sharply from 4.25% to 4.81%, due to a spike in food inflation. In July and August, the inflation is expected to spike closer to the 6% mark. It is  not clear whether the RBI would have a hawkish reaction to the inflation number.

   

• Lastly, the FPI flows were also impacted by Moody’s following up the Fitch downgrade with a downgrade of US banks. That has impacted the Bank Nifty and with its substantial weightage in the Nifty, it has had an impact on the FPI flows also. However, it must be said that FPI flows into debt have been more encouraging in the current month.

However, a very short term perspective on FPI flows could often be misleading as that does not capture the longer term dynamics. So, here are the longer term dynamics of FPI flows.

Longer term perspective still looks very encouraging

While the short term FPI flows may have been volatile, there is also a longer term story that is fairly encouraging. For instance, the month of August may be relatively tepid in terms of FPI flows, but the previous 3 months have been very encouraging in terms of FPI flows. Incidentally, July 2023 was the third month in succession when FPI flows had comfortably crossed the $5 billion mark. After putting in more than $11 billion into Indian equities in the months of May and June 2023, FPIs infused another $5.68 billion in July 2023. That has resulted in net inflows of nearly $17 billion into Indian equities just in the last 3 months. It is, perhaps, a matter of coincidence, but the $17 billion of FPI net inflows between May and July 2023, is nearly half of the outflows for the period from October 2021 to June 2022.

Here is what the FPIs are betting on India for the long term.

• For the FPIs, investing in India is still a major bet on domestic oriented consumer driven companies. Most of the FPI flows have been into India-centric companies rather than globally vulnerable companies like IT or pharma. In short, the bet is on the India story.

   

• There is a big leap transition story also in India. This is an economy set to leap from being a $3.5 trillion GDP economy to a $5 trillion economy in the next 5-6 years. That will translate into massive purchasing power creation and consumer stocks would become natural proxies for the Indian economic growth. 

   

• At a more specific level, there is also the per capita income story, The next 5 years will also see the expansion of per capital income from $2,400 to nearly $4,000. This is also likely to release massive purchasing power by what we today refer to as the base of the purchasing power pyramid. That is another story that FPIs are betting on. 

   

• At a policy level, the FPIs continue to be impressed the RBI has made a distinct shift from managing inflation to ensuring that the growth engines are sustained. Fortunately for the RBI and for India, even the Fed is thinking along similar lines. This would also reduce the average cost of capital. So, apart from being a boost for debt flows, it will also be a boost for equity flows into India. 

There are more positives in the India domestic story. Most of the infrastructure driven sectors are showing good growth and they have a multiplier impact on growth. Also, the FPI flows have also been helped along the way by expectations of a sharply lower current account deficit (CAD) in the current year. Having said that, the recent downgrade by Fitch and later by Moody’s could have negative implications, but these are early days and we have to see how it evolves over time.

Macro FPI flow picture up to August 11, 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 #	3,076.38	195.39	3,271.77	2,969.62	6,241.39
Total for 2023	1,06,474.66	19,821.44	1,26,296.10	21,270.75	1,47,566.85
# – August Data is up to 11th 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 two weeks of August 2023. FPIs are clearly and decisively buyers in equity, although the enthusiasm in the last three weeks appears to have waned. However, that is more of some degree of boredom setting in at higher levels. In the last 90 days, the FPIs infused nearly $17 billion into Indian equities and close $2.3 billion into Indian debt. FPIs have now infused Rs1.26 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 Rs1.48 trillion. (Live equity action on markets page). Here are the key triggers for robust FPI 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, albeit with some ups and downs. Even the Q1FY24 results have been relatively encouraging.

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 11, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
17-Jul-23	3,278.87	3,278.87	399.37	399.37
18-Jul-23	504.66	3,783.53	61.43	460.80
19-Jul-23	2,527.61	6,311.14	308.06	768.86
20-Jul-23	2,193.99	8,505.13	267.23	1,036.09
21-Jul-23	4,638.87	13,144.00	565.41	1,601.50
24-Jul-23	-1,405.07	11,738.93	-171.30	1,430.20
25-Jul-23	230.51	11,969.44	28.14	1,458.34
26-Jul-23	2,854.80	14,824.24	348.96	1,807.30
27-Jul-23	1,130.96	15,955.20	137.94	1,945.24
28-Jul-23	-1,249.82	14,705.38	-152.43	1,792.81
31-Jul-23	1,252.35	15,957.73	152.27	1,945.08
01-Aug-23	-774.18	15,183.55	-94.13	1,850.95
02-Aug-23	25.65	15,209.20	3.12	1,854.07
03-Aug-23	-1,501.84	13,707.36	-181.96	1,672.11
04-Aug-23	216.64	13,924.00	26.19	1,698.30
07-Aug-23	66.39	13,990.39	8.02	1,706.32
08-Aug-23	2,251.98	16,242.37	272.16	1,978.48
09-Aug-23	-58.45	16,183.92	-7.06	1,971.42
10-Aug-23	996.94	17,180.86	120.38	2,091.80
11-Aug-23	2,048.64	19,229.50	247.31	2,339.11

Data Source: NSDL

The week to August 11, 2023 saw FPI inflows of $641 million which is slightly reassuring after the FPIs had turned net sellers in equities in the previous week after a gap of more than 3 months. 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 ($95 million), $1,059 million, and $1,602 million. The latest week saw net FPI inflows of $641 million. This week is certainly reassuring after the net outflows in the previous week.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total FPI flows into Indian equities were Rs19,230 crore or $2.34 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, although the second week is relatively reassuring in terms of FPI flows.

How FPIs are likely to place their bets at current levels?

FPIs are likely to focus on 4 major data points to take a decision on how to address the India flow issue.

• The CME Fedwatch will be closely tracked. It has been gradually showing signs of a likely bounce in hawkishness with a high probability of one more rate hike and a worst-case possibility of even two more rate hikes.

   

• The recent credit rating downgrade of the US economy by Fitch and the banking downgrade by Moody’s could impact India in terms of risk-off flows and the cost of funds for India. After all, India is just at the border of investment grade.

   

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

   

• FPIs will be watching the global oil prices and the Indian rupee closely. Brent crude has spiked to more than $86/bbl on supply concerns while the USDINR has weakened to Rs82.96/$. FPIs would be wary of a sharp spike in oil and a sharp fall in the rupee value as the former would impact the Indian macros while the latter would impact their dollar returns on their investments in India.

For now, the FPIs stay positive on financials, capital goods, autos and FMCG; all domestic plays. However, FPIs continue to be wary of IT and healthcare; being distinctly global plays. FPI flows may slow, but the bets on the domestically driven sectors is likely to continue. A lot will depend on how inflation pans out in the coming months and how the rupee behaves versus the US dollar in the next few days.