Weekly Musings – FPI flows for week ended June 9, 2023

11 Jun 2023 , 09:25 AM

The first two days of June had started off with a bang, but the FPI flows into equities have slowed in the latest week. However, that was made up a surge of flows into debt. The debt flows in the latest week is far from surprising. The monetary policy to be announced on 08-Jun 2023 already had built up expectations of status quo on rates and that had led to global investors locking in at higher yields. Of course, eventually the RBI did hold rates in its June monetary policy.

By the close of May 2023, the FPI flows for 2023 had turned eminently positive. FPI flows into Indian equities had been negative in January and February. The March positive flows were largely guided by the GQG Partners investment in Adani group. April 2023 was the first month that saw decisive FPI inflows of $1.42 billion into equities and May 2023 inflows at $5.30 billion into equities only underscored that shift. By the close of May 2023, FPIs had turned distinctly in favour of Indian equities. With RBI hinting at limited hawkishness (read our blog), debt is also attracting interest. Of course, the big question for debt investments would still be global hawkishness, inclusion of Indian bonds in global indices and other tax related aspects, which have kept FPI slightly ambivalent about debt market investing.

How the macro picture looks by the second week

The table captures monthly FPI flows into equity and debt for 2022 and 2023, with the latter being month-wise.

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 #	8,704.21	1,083.87	9,788.08	1,378.64	11,166.72
Total for 2023 #	29,072.96	9,973.35	39,046.31	9,211.09	48,257.40
# – June Data is up to 09-June only

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

We now have the FPI flow data up to 09-Jun and the outcome of the frenetic buying in May and June has been that FPIs turned net buyers for calendar year 2023. This is even after offsetting the heavy selling in January 2023. As of 09-Jun, FPIs have infused over $4.75 billion into Indian equities and over $5.8 billion into Indian equities and debt combined in calendar year 2023 so far. What were the triggers (live equity action on markets page).

• One of the main reasons for the turnaround in sentiments was that the global hawkishness was peaking, if not coming to an end altogether. The RBI abstained from raising rates in the April policy and even the June policy. While the US has hinted at a pause on rates in June, the Indian markets are clearly hinting at rates topping out.

   

• Indian debt is starting to look a lot more enticing. Remember, bond yields in India were always attractive. The only issue was how it compared in real terms and how stable was the rupee. Both the conditions are now being met. For instance, real rates are well into positive with inflation inching towards 4% mark while the rupee has been stable in the range of 82/$ to 83/$, thanks to dollar flows and RBI intervention.

   

• The third trigger was more domestic in nature, and it was a mix of macro and micro factors. Let us look at the macros first. GDP for FY23 came in at 7.2%, much better than expected. Also, most of the high frequency data points like PMI manufacturing, PMI services, GST collections, e-way bills are all hinting at strong growth. At a micro level, Indian companies have done better than expected in Q4FY23. Interest cost, as a percentage of sales, started to taper; while rural demand has started picking up. But, above all, the manufacturing companies are seeing a sharp improvement in gross margins in the aftermath of a sharp fall in commodity prices globally. 

Year 2023 may have started off on a dull note but by the start of June, FPIs have infused $4.75 billion into equities and another $1 billion into debt. This is nowhere close to the post-pandemic deluge in 2020, but the FPI flows are picking up steadily.

Day-wise FPI equity flows in last three weeks

The table below gives a granular picture of daily flows into Indian equities in the month of April 2023; both in rupee and in dollar terms. The latest week has been shaded.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
22-May-23	752.67	752.67	91.01	91.01
23-May-23	1,289.58	2,042.25	155.75	246.76
24-May-23	319.38	2,361.63	38.57	285.33
25-May-23	1,497.86	3,859.49	181.07	466.40
26-May-23	2,511.68	6,371.17	303.53	769.93
29-May-23	1,789.66	8,160.83	216.35	986.28
30-May-23	2,290.42	10,451.25	277.46	1,263.74
31-May-23	2,441.34	12,892.59	295.09	1,558.83
01-Jun-23	3,837.49	16,730.08	464.15	2,022.98
02-Jun-23	2,651.98	19,382.06	321.62	2,344.60
05-Jun-23	643.15	20,025.21	78.13	2,422.73
06-Jun-23	-512.86	19,512.35	-62.11	2,360.62
07-Jun-23	1,111.41	20,623.76	134.48	2,495.10
08-Jun-23	1,443.99	22,067.75	174.96	2,670.06
09-Jun-23	612.92	22,680.67	74.22	2,744.28

Data Source: NSDL

Based on the 3 weeks of rolling FPI flows into equities, here are some interesting inferences that can be drawn.

• We have covered FPI flows into equities over the last 3 weeks in succession. Interestingly, the FPIs have been net buyers in equities on all days, except just one day in the latest week. That shows a lot of FPI enthusiasm. 

   

• For the week to 09-Jun, the FPI net inflows into equities stood at Rs3,299 crore or $400 million. This is lower than the previous week, but the undertone continues to be positive with debt joining the party in the latest week.

   

• If you look at the last 3 weeks on a cumulative basis, total FPI flows into Indian equities were Rs22,681 crore or $2.75 billion. For the FPIs, it is relative valuations vis-à-vis other EMs that would eventually decide on the flows.

In the last 3 weeks, FPIs have been consistently on the buy side of Indian equities, except for just one day. As we said earlier, the flows in May and June have been so encouraging that FPIs are now net buyers in debt and equity for the calendar 2023 so far.

How do we see the FPI flows story in June 2023?

Let us finally get into some crystal gazing. How do we see FPI flows into Indian equities in the rest of June 2023? As we have been underlining, the action could be on the debt flow front. Equity flows may now be a bit ambivalent considering that the markets have rallied quite sharply and that takes away some of the margin of safety for the global investors. While FPI flows are now positive in 2023, they are still a long way from compensating for the outflows of $34 billion between October 2021 and June 2022. Not surprisingly, the FPI AUC (assets under custody) is still way below the October 2021 peak levels of $667 billion.

Broadly, two factors will trigger FPI flows in the coming week and the rest of June. Firstly, a lot will depend on what the Fed does in its policy statement next week. If it holds rates, it would trigger a lot of risk-on flows into markets like India. Secondly, one must not lose sight of the recession argument. That is likely to make FPIs risk averse. Lastly, the India data on inflation and IIP will be crucial to chart the trajectory of FPI flows in the days ahead. For now, FPIs have given a thumbs up to India.