Weekly Musings – FPI flows for week ended September 22, 2023

25 Sep 2023 , 07:08 AM

Between the end of July and the end of September, the FPI sentiments have gone from optimism to scepticism to pessimism. Well, pessimism may be a strong word, but the numbers in September 2023 have been in stark contrast to the numbers between May 2023 and August 2023. Between May 2023 and July 2023, the FPIs infused around $5.5 billion each month, taking their 3-month infusion into Indian equities to $17 billion. In comparison, August was a relative quiet month with just about $1.48 billion being infused into Indian equities. However, the situation at the start of September still was that FPIs had infused $18.5 billion in the last 4 months between May and August with $17 billion coming into Indian equities in the first 3 months itself. This had led to FPI buying in 2023 offsetting the selling in 2022 by a margin. In comparison, the month of September has seen concerted selling by the foreign portfolio investors (FPIs) with still one more week to go.

For the first 3 weeks of September, the FPIs have sold stocks worth $1.22 billion. Now, that may not look to be too bad when you compare with the $18.5 billion of inflows in the previous 4 months, but it is selling nevertheless. For the time being, the impact is not really being felt as domestic institutions, HNIs and retail investors are still buying. However, there were several factors that triggered the FPI selling. The negative triggers started in early August when Fitch and Moody’s had downgraded the US sovereign rating and the ratings of US mid-sized banks respectively. While the G-20 Summit in India did bring about a feel good factor, that was offset by two factors in the latest week. Firstly, the diplomatic stand-off with Canada appears to be worsening. Secondly, the hawkish statement by the Fed, despite not hiking rates, has not gone down well with the investors. For FPIs, it now looks like the broad theme is risk-off, although they continue to be committed to India at a secular level.

What triggered FPI selling in the week to September 22, 2023

If you look at things in perspective, the selling in September is nothing to be overly concerned about. The 1.22 billion of selling in September comes on the back of $18.5 billion infused in the 4 months between May and August 2023. However, the FPI sentiments appeared to have soured with the FPIs being net sellers on most days. The FPIs have been net sellers in 11 out of the last 19 trading sessions and that hints at pressure of FPI selling. The latest week saw FPI net selling of $648 million. Here is what triggered the FPI selling in the week.

• The diplomatic stand-off with Canada has been one of the factors souring FPI flows into India. Canadian prime minister, Justin Trudeau, has accused India of engineering the killing of one of the Khalistan separatists in Canada. While India has remained concerned over such divisive forces operating globally, it has denied any hand in the occurrence. The concerns are due to the deep links between the two countries in terms of investments, students, and job seekers. Above all, in terms of FPI investments into India, Canada ranks 7th with more than $25 billion invested in Indian equities.

   

• For the week, the September 2023 Fed policy was the big event. As expected, the Fed maintained status quo on rates, but that was not the full story. The Fed was a lot more hawkish than expected and underlined that it would relent on rate hikes till inflation was subdued. Above all, the Fed has reduced the number of likely rate cuts in 2024 from four to just two. That means, rates will remain higher for a longer period and that is evident in the Fed projections too. This led to a major sell-off in financials across the global markets and even Indian banks were not spared. FPIs were heavy sellers in banks.

   

• FPIs are also sceptical about the September quarter results and a slew of data points next week. That led to a more cautious approach by the Fed. For instance, India will announce the current account data next week and the deficit for the June quarter is expected to be higher than expected. In addition, two important US data points will also be out next week. The US BEA announces the third and final estimate for June quarter growth and that had been lowered last month to 2.1%. Any further downgrades would hint at a hard landing of the US economy. Also, the US BEA (Bureau of Economic Analysis will put out the PCE inflation data for August, the key data point that the Fed uses to decide on rate action. If the PCE inflation also spikes like the consumer inflation in the US by about 50 bps, then rate hike in the November meeting becomes almost certain. That is keeping FPIs slightly wary ahead of key data points.

   

• Finally, there is the all-important combination of oil prices and USDINR equations. Brent Crude has been hovering in the range of $93/bbl to $94/bbl and that is likely to put a lot of macro pressure on India. The USDINR has been hovering around 83/$ and analysts believe it could have been a lot worse had it not been for RBI intervention. US bond yields have tapered to 4.43% after crossing a 16 year high of 4.5%. At the same time, the US dollar index (DXY) is now above a multi-month high of 105.60. Both these are likely to put pressure on the rupee and that is not a great feeling for the FPI flows.

If August was the taming of the FPI bull, then September has shown genuine concerns in terms of FPI flows into India. For now, the impact is not being felt as domestic flows are filling the gap. However, it must be remembered that FPI flows not only impact stock markets but also the value of the rupee. It is this double whammy that makes it powerful.

Macro FPI flow picture up to September 22, 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	9,232.57	3,029.71	12,262.28	6,075.54	18,337.82
Sep-2023 #	-10,982.50	818.38	-10,164.12	64.48	-10,099.64
Total for 2023	1,01,648.35	23,474.14	1,25,122.49	24,441.15	1,49,563.64
# – September Data is up to 22nd September

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

In the obsession with short term trends and weekly flows, it is entirely possible to miss out on the longer term story. The table above captures that longer term picture. The longer term FPI flows in the table above provide a better perspective of which way the FPI sentiments are headed in the current calendar year. The longer term big picture is still robust. The overall inflows into equities in 2023 have offset the outflows in 2022, but only just. The picture becomes clearer if you look at the comparison of secondary market flows; and in that context, the FPI flows in 2023 have a long way to go to offset the selling in Calendar 2022. The year 2023 has seen secondary market inflows of Rs1.02 trillion compared to outflows of Rs1.46 trillion in 2023. The moral of the story is that the long term story looks good, and the traction on debt flows is also better. However, secondary market flows in 2023 have a long way to go before it can offset the selloff in 2022.

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 September 22, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
28-Aug-23	-1,706.33	-1,706.33	-206.45	-206.45
29-Aug-23	2,476.01	769.68	299.71	93.26
30-Aug-23	792.77	1,562.45	95.92	189.18
31-Aug-23	9.86	1,572.31	1.19	190.37
01-Sep-23	1,258.56	2,830.87	152.23	342.60
04-Sep-23	1,778.00	4,608.87	215.09	557.69
05-Sep-23	-2,375.64	2,233.23	-287.13	270.56
06-Sep-23	-1,311.57	921.66	-158.13	112.43
07-Sep-23	-2,832.84	-1,911.18	-340.94	-228.51
08-Sep-23	-719.15	-2,630.33	-86.45	-314.96
11-Sep-23	-97.07	-2,727.40	-11.68	-326.64
12-Sep-23	1,466.70	-1,260.70	176.96	-149.68
13-Sep-23	-330.83	-1,591.53	-39.87	-189.55
14-Sep-23	-2,293.06	-3,884.59	-276.43	-465.98
15-Sep-23	688.78	-3,195.81	83.01	-382.97
18-Sep-23	300.84	-2,894.97	36.22	-346.75
19-Sep-23	0.00	-2,894.97	0.00	-346.75
20-Sep-23	-745.58	-3,640.55	-89.60	-436.35
21-Sep-23	-3,075.88	-6,716.43	-369.45	-805.80
22-Sep-23	-1,875.38	-8,591.81	-225.54	-1,031.34

Data Source: NSDL

The week to September 22, 2023 saw net FPI outflows of $648 million or Rs5,396 crore. That was due to the combination of the Canada diplomatic standoff and the ultra-hawkish language of the Fed. Here is the bigger picture of intermediate FPI flows.

• In the previous 3 rolling weeks, FPI witnessed outflows at $(68) million, outflows of $(658) million, and inflows of $343 million. The latest week saw net FPI outflows of $(648) million; so, it is the third successive week of FPI outflows in a row.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from Indian equities were to the tune of Rs8,592 crore or $1.03 billion. This is the second time in the last 5 months that the rolling 4-month FPI flows have been negative; with the previous occasion being the last week. FPI selling is clearly adding up in September.

What will drive FPI flows in the coming weeks?

There will be 4 key drivers of FPI flows in the coming week to September 29, 2023.

• The big domestic driver will be the current account deficit data to be announced by the RBI. The FPIs would be keenly looking at the CAD for the quarter ended June as a percentage of GDP. However, they would be more interested in seeing if the full year CAD projection crosses 2% of GDP.

   

• In terms of US data flows, the first big data to watch would be the third and final estimate of June quarter GDP. Last second estimate had cut the GDP estimate for June to 2.1% and any further cuts could lead to the risk of a hard landing for the US economy.

   

• The one factor that FPIs would really watch out for next week would be the PCE (personal consumption expenditure) inflation for August 2023. The consumer inflation had spiked by 50 bps, but it is the PCE inflation that the Fed relies on. If PCE also spikes by 50 bps, then FPIs would turn wary as it makes November rate hike inevitable.

   

• Needless to say, FPIs will be tracking the crude oil prices and the USDINR equation. As a proxy to the USDINR, the FPIs would actually be taking a close look at US bond yields and the US Dollar Index (DXY); and both are at multi-month highs. Oil may be the bigger concern due to its potential to import inflation.

In the last few months, the India trades of FPIs have focused more on the sectors benefiting from the revival of the capital cycle like power and capital goods. The big question next week is whether the big Canadian investors like CPPIB and CPDQ ( the 2 major Canadian pension fund) take a divestment call on Indian equities. It does look unlikely, but in the volatile world of capital markets, nothing can be ruled out.