Weekly Musings – FPI flows for week ended September 29, 2023

2 Oct 2023 , 08:56 AM

For the month of September 2023, the foreign portfolio investors were net sellers for the first time since February 2023. Between March 2023 and August 2023, the FPIs had infused $20.62 billion into Indian equities of  which $18.23 billion had come in just in the last 4 months between May and August 2023. The year 2023 had started off on a negative note with FPIs net sellers to the tune of $3.52 billion in January and continued to be moderate sellers in February. However, from March onwards, the FPIs have been decisively on the buy side. That trend has been broken in the month of September 2023 with FPIs net sellers to the tune of $1.78 billion. That is actually quite small in the context of the buying that has already happened in 2023. In fact, as of the close of September 2023, FPIs have infused net amount of $14.67 billion into Indian equities. But that is not all.

The year 2023 also saw net inflows of $2.88 billion into debt. In the first 9 months of 2023 the FPIs have been net sellers in debt only in March and they were net buyers for the remaining 8 months. There were several triggers for the FPI buying in debt. Firstly, the US bond yields were supposed to cannibalize flows into Indian debt as risk-off was the name of the game. While, that happened to some extent, net flows into Indian debt were still positive. The second big trigger was the expectation that Indian debt would be included in JP Morgan Global Emerging Markets Bond Index. Now that is officially happening by mid-2024 and that is likely to trigger debt inflows of $40 billion into India. This year there has been a good deal of front buying ahead of the event. The moral of the story is that even as FPIs have been ambivalent about equity, debt flows have been relatively stable.

What triggered FPI selling in the week to September 29, 2023

The FPIs selling of $1.78 billion in September 2023 in Indian equities must be seen in the context of the $20.67 billion that FPIs had infused between March and August. However, what did stand out about September was the relentless tendency towards selling on most trading days. Out of the 18 trading sessions in the last 4 weeks, FPIs were net sellers in 13 trading sessions and were net buyers only in 5 sessions. That, probably, gives a better picture of the FPI sentiments in September. The latest week saw FPI net selling of $554 million. Here is what triggered the FPI selling in the week.

• Fed hawkishness continues to be the big risk for the global markets and emerging markets like India are the most vulnerable. The narrative that is emerging in the last few months from the US is that the Fed may not hike rates too sharply but will hold the rates at elevated levels for much longer. That means, the Fed rates will stay well above 5% even till the end of 2024, which means that inflation is stickier than expected and rates are not coming down in a hurry. That has led to expectations of higher bond yields in the US and dollar strength. Both these factors have put pressure on FPI flows into India.

   

• Macro risks are never too far off and the other big macro risk that caused the selling in September was fears of a likely shutdown in the US government machinery. The bill approving the expenditure of the government had to be passed by end of September failing which the government would automatically cut down on non-essential spending, which would include most worker salaries. That would have been disastrous for the US economy and for the global economy too and that was the big overhang in September. Fortunately, the US House and Senate managed to get a 45 day extension just a few hours ahead of the deadline. However, it does raise the concern flagged by Fitch about poor governance standards when it came to the US economy.

   

• Indian inflation continues to be a challenge, despite the relatively flattering growth numbers. India consumer inflation has now once again been above the 6% tolerance limit for 2 months in a row and shows no signs of slowing down. Most of the pressure has come from food prices, but in this period, the crude prices have also gone up. The actual inflation would be much higher if market prices of crude oil are also factored into the calculations. There were other data points too last like the India current account deficit (CAD), the US GDP final estimate and the August PCE inflation. Most of them have been on track with the strong US GDP numbers making a case for the Fed to stay hawkish for longer.

   

• Above all, there is the delicate equation between Brent Crude prices and the USDINR. Brent Crude has tapered to $92/bbl after touching a peak of $92/bbl, but that is more due to the strength of the dollar and a lot will depend on the OPEC meeting on October 04, 2023. Rupee has consistently been above 83/$ this week and analysts believe it could have been a lot worse had it not been for RBI intervention. The triggers have been the relentless spike in the US bond yields and the dollar index. In fact, during the week, the US bond yields touched a high of 4.69% while the US Dollar Index (DXY) is now well above 106.50. Both are applying pressure on the Indian rupee and adding to the imported inflation. Weak rupee is making FPIs uncomfortable as it impacts their dollar returns. 

If August saw the taming of the FPI bull, then September has been about negative FPI flows into India. The road ahead will depend on factors like domestic inflation, US Fed hawkishness etc. The big theme could be risk-off buying and that is where EMs like India could face pressure in the coming weeks.

Macro FPI flow picture up to September 29, 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 #	(14,576.40)	(191.10)	(14,767.50)	957.11	(13,810.39)
Total for 2023	98,054.45	22,464.66	1,20,519.11	25,333.78	1,45,852.89
# – September Data is up to 29th September

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

While September 2023 may have been a disappointing month for FPI flows the macro picture is still intact. Let us look at some of the numbers captured in the above table. The longer term FPI flows provide a better perspective of which way the FPI sentiments are headed in the current calendar year. The overall inflows into equities in 2023 have just about offset the outflows in 2022. The real picture emerges 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 Rs0.98 trillion compared to outflows of Rs1.46 trillion in 2023. The long term story looks good, and the traction on debt flows is getting better. However, secondary market inflows in 2023 need to be able to 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 29, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
04-Sep-23	1,778.00	1,778.00	215.09	215.09
05-Sep-23	-2,375.64	-597.64	-287.13	-72.04
06-Sep-23	-1,311.57	-1,909.21	-158.13	-230.17
07-Sep-23	-2,832.84	-4,742.05	-340.94	-571.11
08-Sep-23	-719.15	-5,461.20	-86.45	-657.56
11-Sep-23	-97.07	-5,558.27	-11.68	-669.24
12-Sep-23	1,466.70	-4,091.57	176.96	-492.28
13-Sep-23	-330.83	-4,422.40	-39.87	-532.15
14-Sep-23	-2,293.06	-6,715.46	-276.43	-808.58
15-Sep-23	688.78	-6,026.68	83.01	-725.57
18-Sep-23	300.84	-5,725.84	36.22	-689.35
19-Sep-23	0.00	-5,725.84	0.00	-689.35
20-Sep-23	-745.58	-6,471.42	-89.60	-778.95
21-Sep-23	-3,075.88	-9,547.30	-369.45	-1,148.40
22-Sep-23	-1,875.38	-11,422.68	-225.54	-1,373.94
25-Sep-23	-1,165.26	-12,587.94	-140.48	-1,514.42
26-Sep-23	-1,386.62	-13,974.56	-166.86	-1,681.28
27-Sep-23	137.82	-13,836.74	16.56	-1,664.72
28-Sep-23	-2,189.32	-16,026.06	-263.08	-1,927.80
29-Sep-23	0.00	-16,026.06	0.00	-1,927.80

Data Source: NSDL

The week to September 29, 2023 saw net FPI outflows of $554 million or Rs4,603 crore. That was due to the hawkish language of the Fed and the potential US government shutdown. Here is the bigger picture of intermediate FPI flows.

• In the previous 3 rolling weeks, FPI witnessed outflows at $(648) million, outflows of $(68) million, and outflows of $(658) million. The latest week saw net FPI outflows of $(554) million; so, it is the fourth 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 Rs16,026 crore or $1.93 billion. This is the third time in the last 5 months that the rolling 4-week FPI flows have been negative. FPI selling pressure 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 October 06, 2023.

• It is a truncated week, but the big trigger for FPI flows will be the RBI monetary policy to be announced on Friday, October 06, 2023. The FPIs will be closely watching the language of the RBI on rate guidance as well as on the liquidity management front.

   

• In terms of US data flows, the big event will be the Fed speak by Jerome Powell and Michelle Bowman scheduled for the coming week. Both gravitate towards a hawkish view and hence their outlook on rates trajectory would be critical.

   

• FPIs are likely to be watching the auto numbers for September 2023 closely. This is not only from the perspective of the auto sector, but also as an indicator of the extent to which the erratic monsoons have impacted the rural demand factor.

   

• Not to forget, the FPIs will be tracking the crude oil prices and the USDINR equation. As a proxy, the FPIs would be tracking the US 10-year bond yields and the US Dollar Index (DXY); and both are at multi-month highs. FPIs continue to worry about crude prices due to its potential to import inflation into India.

The good news is that the diplomatic standoff with Canada appears to be fizzling out. Canadian pension funds like CPPIB and CPDQ have confirmed that their business decisions would be predicated on a set of business parameter only. That gives some breathing space for the markets on the front of FPI flows.