Weekly Musings – FPI flows for week ended August 25, 2023

28 Aug 2023 , 07:30 AM

For the week ended August 25, 2023, the good news was that overall FPI net flows into equities was still in positive zone. However, at $278 million, the net inflow was too small to make any visible impact on the markets. Unlike the previous, this was a full week so there can be no complaints about weak PFI flows. They were weak for a reason. FPIs have turned increasingly risk-off and that is evident in the pace of portfolio flows into Indian markets. Above all, the Indian indices have also shown a lot of ambivalence. The Nifty got tantalizing closely to the 20,000 mark, but has given up close to 750 points from that level. One can argue that the fall was largely about banks, the but the fact of the matter is that the Nifty is making lower tops and lower bottoms and that is not really enthusing the global investors. 

In the latest week to August 25, 2023, the FPI flows into equities at $278 million were lower than the $641 million and $617 million that came into Indian equities in the previous two weeks. One argument is that these heavy outflows were largely accounted for by two big block deals. Firstly, Hulst BV, an arm of Barings, sold nearly $1 billion of Coforge during the month. While most of the stock got absorbed by buyers, the absorption came largely from the domestic funds and to that extent FPIs remained net sellers. The other big block deal in the week was the 3% stake sale in Paytm by Antfin, the Chinese PE fund. However, that cannot be a valid objection since FPI inflows in the previous week were largely driven by GQG Partners investing heavily into the Adani group. For August 2023 till date, the FPIs have just infused $1.29 billion with 4 more trading days still to go. However, this is a far cry from the $17 billion of FPI inflows into equities between May and July 2023.

Why did FPI flows into India slow in the latest week?

FPI sentiments are slightly more secular and do not change on a very short term basis. However, several factors have been responsible for the slowdown in FPI flows in August 2023 as compared to the previous 3 months. The picture of FPI flows may be slightly hazy in August since there have been a lot of big block deals both ways; on the buy side and on the sell side. With $1.29 billion in FPI flows in August, it is likely to fall way of short of the previous 3 months, when FPI flows were well above the $5 billion mark. But, here are some factors that contributed to the slowing of FPI flows into India in August 2023.

• The overhang of the twin downgrades in the US is still rankling FPI flows into India. Since the start of August, Fitch downgraded US debt a notch from AAA to AA+. In addition, Moody’s downgraded small and mid-sized US banks, which looked most vulnerable. These two factors resulted in a major risk-off selling across EMs and obviously India being a part of the overall EM allocation, was not spared. 

   

• The second big factor was the uncertainty ahead of the Jackson Hole speech by Jerome Powell over the weekend. Markets were highly ambivalent about what Powell would speak at Jackson Hole. Unlike in 2022, Powell was expected to make more decisive noises about the trajectory of rates. However, that was not to be. His speech at Jackson Hole continue to remain ambivalent on the subject of rates trajectory, other than saying that they would continue to stay hawkish still inflation was reined in.

   

• Thirdly, the problems were more at a domestic level too. Consumer inflation in India spiked from 4.81% to 7.44% and that has raised a dilemma for the RBI. If it hikes rates, it impacts cost of funds for corporates and hits the solvency ratios of industrials. On the other hand, if the RBI delays on rate hikes then it could find itself in a situation where Indian bonds are priced out of the market due to lower real returns. Till there is clarity on how the RBI proposes to handle the situation, the FPIs are unlikely to come back into India in a big way. 

   

• Lastly, the consistently weakening rupee is also a matter of concern, combined with the spike in oil prices is a matter for concern for the India investors. This week, there has been some consolation with the rupee strengthening to Rs82.55/$ while Brent Crude prices have tapered to $84.50/bbl. However, most FPIs are clear that rupee strength is due to RBI intervention and that cannot continue for ever, especially if the US rates remain on the higher side.

So, it is a mix of factors spurring weak FPI flows in recent weeks. It remains to be seen if FPIs come back to invest in India after a brief pause. The longer term perspective of Indian equities is still positive, but that is normally a good story in good times. 

Macro FPI flow picture up to August 25, 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 #	8,734.42	1,955.55	10,689.97	4,076.38	14,766.35
Total for 2023	1,12,132.70	21,581.60	1,33,714.30	22,377.51	1,56,091.81
# – August Data is up to 25th August

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

The longer term FPI flows as captured in the table above provide a much better perspective. Notwithstanding the slowing of PFI flows in August 2023, the FPIs are clearly and decisively buyers in equity in the year 2023. More importantly, the inflows into equities in 2023 has more than offset the outflows in 2022. For instance, as of date in 2023, the FPI inflows into equity stand at Rs1.33 trillion compared to outflows of Rs1.21 trillion in 2022. Hopefully, if the flows in the remaining months of 2023 are robust, we may even cover up the selling in the last quarter of calendar 2021. 

The story remains positive, even if you look at overall flows of equity and debt combined. Against net outflows of Rs1.33 trillion in 2022, the FPIs have infused Rs1.56 trillion overall into equity and debt till date in 2023. Even debt has turned around from outflows in 2022 to inflows in 2023. 

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 25, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
31-Jul-23	1,252.35	1,252.35	152.27	152.27
01-Aug-23	-774.18	478.17	-94.13	58.14
02-Aug-23	25.65	503.82	3.12	61.26
03-Aug-23	-1,501.84	-998.02	-181.96	-120.70
04-Aug-23	216.64	-781.38	26.19	-94.51
07-Aug-23	66.39	-714.99	8.02	-86.49
08-Aug-23	2,251.98	1,536.99	272.16	185.67
09-Aug-23	-58.45	1,478.54	-7.06	178.61
10-Aug-23	996.94	2,475.48	120.38	298.99
11-Aug-23	2,048.64	4,524.12	247.31	546.30
14-Aug-23	-2,534.61	1,989.51	-306.18	240.12
15-Aug-23	0.00	1,989.51	0.00	240.12
16-Aug-23	0.00	1,989.51	0.00	240.12
17-Aug-23	8,643.48	10,632.99	1,041.99	1,282.11
18-Aug-23	-986.97	9,646.02	-118.73	1,163.38
21-Aug-23	574.85	10,220.87	69.19	1,232.57
22-Aug-23	-1,277.22	8,943.65	-153.67	1,078.90
23-Aug-23	-108.75	8,834.90	-13.09	1,065.81
24-Aug-23	901.63	9,736.53	108.73	1,174.54
25-Aug-23	2,205.79	11,942.32	267.20	1,441.74

Data Source: NSDL

The week to August 25, 2023 saw net FPI inflows of $278 million which is lower than the inflows of over $600 million in the previous 2 weeks. However, that is more due to major block selling by FPIs in select counters like Coforge and Paytm during the latest week. Here is what we read from the above table. 

• In the previous 3 rolling weeks, FPI infusion into Indian equities has been $617 million, $641 million and ($95 million). The latest week saw net FPI inflows tapering further to $278 million; albeit due to major blocks sold in Coforge and Paytm by FPIs.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total FPI flows into Indian equities were Rs11,942 crore or $1.44 billion. In the last 20 trading sessions, there have been 11 days of net buying, 2 days of holidays and 7 days of net selling. The story is gradually shifting in favour of the sellers.

Key drivers of FPI flows in coming weeks?

FPIs are likely to focus on 5 major data points, which will largely determine the colour, direction, and quantum of flows into Indian equities. 

• In the aftermath of the Powell speech at the Jackson Hole Symposium, the CME Fedwatch will be closely tracked. It has been gradually showing signs of hawkishness with a high probability of 2 more rate hikes. FPIs would not be too keen on Indian equities if the US remains hawkish and India stays ambivalent.

   

• Domestic inflation has surged to 7.44% and that is something that is unnerving the FPIs a good deal. There are concerns that food inflation could stay elevated till the stocks come into mandis and even after that the impact of higher crude oil prices could be pronounced. In short, it is likely to cut valuations of Indian markets. 

   

• Oil will continue to be focus for FPIs due to India’s overt dependence on crude imports. Brent Crude tapered after touching a high of $87/bbl and then fell to $84.40/bbl on growth concerns. Oil is most likely to be in a range, but yoy contribution of oil prices to inflation is likely to start rising.

   

• FPIs prefer a steady USDINR, as it preserves dollar returns. In the week before last, the rupee weakened to its lowest point of 83.16/$ which has made FPIs cautious. However, in the latest week, the persistent RBI intervention selling dollars has strengthened the rupee to 82.55/$ levels. FPIs would still be sceptical if these interventions can sustain.

   

• Finally, FPIs would be focused on some very critical data points. Firstly, there is the India Q1 GDP coming out this week, which will give a picture of how the Indian economy has growth. Also, there is the US PCE inflation and US GDP second estimates coming out in the coming week of August; all critical factors influencing FPI flows.

Currently, FPIs are betting on domestic India plays over global plays. Clearly, it is banks and consumer discretionary over IT and pharma. Also, FPIs have shown a preference for sectors like capital goods where the revival of the capital cycle is having a salutary effect. FPI flows are likely to remain slow, although they may not falter or turn abjectly negative, as the overall India story remains intact from a secular standpoint. The one big concern for FPIs would be the inflation surge; and that is yet to be reined in.