FII action sees sharp recovery in second half of August 2024

6 Sep 2024 , 12:25 PM

FPIS NET BUY $876 MILLION IN AUGUST 2024

The month of August 2024 was a relatively subdued month in terms of FPI flows, compared to the previous two months of June and July 2024. After being net sellers in equities to the tune of ($3.06) Billion in May 2024; the FPIs infused $3.18 Billion and $3.87 Billion into Indian equities in June and July 2024 respectively. Clearly, the scenario post-polls and the swearing in of the NDA government led to a turnaround in FPI flows. However, compared to June and July, the FPI flows in August were a lot more volatile and erratic. For example, net inflows of $876 Million in August 2024 may look like a fairly moderate inflow figure. However, what that does not tell you was that FPI were net sellers in the first half of August 2024 to the tune of ($2,243) Million and net buyers of $3,119 Million in the second half of August 2024. But, why the sudden change in sentiments between H1 and H2 of August?

Apart from the sharp selling in the first half of August and sharp buying in the second half, there were specific data flows too. The negative sentiments in the first half of August was on account of the weak US labour data and unemployment touching 4.3%. That raised fears of a hard landing for US markets. However, with rising probability of the US cutting rates in September, FPIs again went risk-on in EMs like India. India also reported lower CPI inflation and stronger nominal GDP growth. However, FPIs preferred defensives over cyclicals in the month of August 2024. The sectoral gross selling in the month of August 2024 was at $(2,744) Million while the sectoral gross buying was at $3,620 Million, resulting in net inflows of $876 Million. Out of the $876 Million of net inflows in August 2024, secondary markets saw net outflows of ($656) Million which was offset by $1,532 Million coming into IPOs. FPI inflows were focused in Healthcare, Consumer Durables, Consumer Services, IT, and FMCG; while selling was evident in BFSI, Metals, Automobiles, Realty, and Cement.

FACTORS THAT INFLUENCED FPI FLOWS IN AUGUST 2024

Broadly, there were 4 factors that had an impact on the FPI flows in the month of July 2024.

1. The month of August started off on a weak note with the US jobs data betraying signs of a slowdown in growth. The unemployment rate which had been under 3.5% a year ago, edged up to 4.3% in July 2024. That was a clear sign of a slowdown in growth and the markets were rife with reports that the US could be up against negative growth in the coming quarters. The negative yield curve spread also ratified that view.
2. However, that changed in the second half of the month after the Fed policy minutes in August clearly hinted that the Fed would take up the first rate cut in the September 18, 2024 FOMC meeting. This view was ratified by Jerome Powell in his speech at Jackson Hole, where he underlined that the time was finally ripe for a rate cut. Meanwhile the CME Fedwatch is already pencilling in 3-4 rate cuts in 2024 and around 8-9 rate cuts by end of 2024. For now, that may sound unrealistic, but you never know!
3. The geopolitical continued to be in a state of flux. There is not much progress in the Middle East and West Asia, although Iran and Israel have just stopped short of an all-out war. However, the anti-Israel sentiments in the Middle East and West Asia are building up and the US and other Western powers are surely worried about that. But, the bigger problem is in Russia where the war with Ukraine is intensifying. After Ukraine took over parts of Russia, the response has been quick and ruthless. Zelensky had been asking for more armaments to defend the territory, but global support is also turning cautious.
4. Towards the end of the month the India GDP growth for Q1FY25 came in lower than expected at 6.7%. That was lower than the street expectation in the range of 6.9%-7.0%. However, scratch the surface and the news is not all that bad. For example, the slowdown happened in agriculture and services, which can be attributed to the monsoons and the elections. However, manufacturing was sharply higher. More importantly, despite lower real GDP growth, the nominal GDP growth in Q1FY25 was 120 bps higher on a yoy basis. That comes as a major solace for the FPIs.

The month of August saw a genuine turnaround in the second half in terms of FPI flows. Let us now turn to the sectors that triggered FPI flows in August 2024 and the AUC.

FPI AUC SCALES RECORD $901 BILLION IN AUGUST 2024

Assets under custody (AUC) is the closing market value of equities held by FPIs. It is a function of FPI flows as well as price accretion or depletion (as the case may be). Between May 2024 and August 2024, the FPI AUC has gone from under $800 Billion to $901 Billion. However, if you compare the current AUC with the pervious peak AUC of $667 Billion in October 2021, it is a good 35.08% higher. Here is a quick MOM comparison of FPI AUC.

Industry Group	FPI AUC (Aug 2024) ($ Billion)	FPI AUC (Jul 2024) ($ Billion)
Financials (BFSI)	246.55	244.78
Information Technology (IT) Services	86.46	82.42
Oil & Gas	76.40	76.00
Automobiles and Auto Components	70.55	72.17
Healthcare and Pharmaceuticals	56.04	52.14
Fast Moving Consumer Goods (FMCG)	55.95	54.45
Capital Goods	48.40	49.75
Consumer Services	40.22	36.44
Power (generation and transmission)	38.38	39.94
Telecommunications	35.12	33.08
Consumer Durables	27.36	26.10
Metals and Mining	25.62	26.40
Services	19.43	19.37
Realty	18.76	19.59
Construction	17.43	18.12
Cement	15.35	16.35
Chemicals	14.29	14.40
Top 17 Sectors	892.28	881.50
Other 6 sectors	8.3	9.22
Total FPI AUC	900.62	890.72

Data Source: NSDL

The table above captures the top 17 sectors where the FPI AUC is more than $10 Billion as of the close of August 2024. NSDL has pruned the list of sectors to 23. Out of these 23 sectors, the AUC of the top-17 sectors accounted for 99.07% of total FPI AUC of $900.62 Billion. The FPI AUC has crossed the $900 Billion mark for the first time ever.

What about the components of the AUC for as of August 2024. At $246.55 Billion, BFSI continues to dominate the AUC stakes, despite persistent selling in recent months, and AUM depletion the previous months. The AUC of financials accounts for 27.38% of the total AUC of FPIs. The other key sectors by AUC were IT, oil & gas, automobiles, healthcare, FMCG, capital goods, consumer services, and power. In terms of MOM change in AUC in August 2024, positive accretion was seen in IT, healthcare, FMCG, consumer services and telecom. AUC pressure was visible in oil & gas, auto, capital goods, power, and metals.

JULY FPI BUYING DRIVEN LARGELY BY DEFENSIVE SECTORS

In August 2024, FPIs were net buyers of $876 Million in Indian equities. Not surprisingly, there were several sectors that saw strong positive net flows from FPIs in the month.

FPI Net Buying in Sectors	H1-Aug-24 ($ Million)	H2-Aug-24 ($ Million)	Aug-24 ($ Million)
Healthcare	412	282	694
Consumer Durables	-70	632	562
Consumer Services	262	234	496
Information Technology	-59	540	481
Fast Moving Consumer Goods (FMCG)	213	216	429
Services	-249	507	258
Others	39	214	253
Telecommunication	79	167	246
Oil and Gas	-156	300	144

Data Source: NSDL

The top 5 sectors that saw net inflows from FPIs were Healthcare, Consumer Durables, Consumer Services, IT and FMCG. Healthcare remained preferred FPI bet for second month in a row, while FPI flows into consumer services came largely through IPOs. IT and FMCG were the expected candidates, as they have been in recent months. Interestingly, after the tumult of recent months, IT is back on the radar of FPIs. The broad theme was that the FPI inflows was concentrated in the defensive sectors. Basically, the FPI trade in August was long on defensives and short on cyclicals, as we shall see in the following paragraph.

AUGUST FPI SELLING DOMINATED BY BFSI, METALS, AND AUTO

Here is a sectoral break-up of FPI net outflows from Indian equities in the month of August 2024, with the colour of flows broken up into the first half and second half of the month.

FPI Net Selling in Sectors	H1-Aug-24 ($ Million)	H2-Aug-24 ($ Million)	Aug-24 ($ Million)
Financial Services (BFSI)	-1,762	332	-1,430
Metals & Mining	-318	-132	-450
Automobile	-194	-89	-283
Realty	-106	-33	-139
Construction Materials	-243	107	-136
Power	139	-275	-136

Data Source: NSDL

In a month, when the FPIs were net buyers to the tune of a mere $876 Million, the selling was bound to be intense. More importantly, there was a huge dichotomy with heavy secondary market selling by FPIs in the first half of the month and a surge in IPO flows from FPIs in the second half of August. The month of August 2024 saw selling mostly in the cyclicals, with BFSI bearing the brunt of the selling for the second month in a row. However, if you scratch the surface, there seems to be some method in the madness. For instance, most of the sectors that saw FPI selling; like BFSI, realty, automobiles, and construction materials; are rate sensitive. Despite rising costs, RBI is yet to give a hint on rate cuts.

It must be said here that many of the important triggers in the last couple of day so August, so the FPIs may not have enough time to reach. For instance, the US GDP for Q2-2024 got upgraded by a further 20 bps to 3.0%, which largely dispels short-term hard landing fears. India GDP growth at 6.7% may have been lower, but the nominal GDP was 120 bps higher yoy in Q1FY25. The numbers should look a lot better once inflation settles. In addition, India has maintained its fiscal prudence and core sector bounced to 6.12%. Above all, markets are keeping fingers crossed ahead of the upcoming crucial FOMC meet on September 18, 2024.

MACRO PICTURE OF FPI FLOWS IN LAST 3 YEARS

Here is a consolidated picture of FPI net flows across the last 3 years viz. 2022, 2023 and the year 2024 as of date. The table captures the net flows into equity and debt & hybrids separately, to give an overall picture of FPI flows.

Calendar Month	FPI Flows Secondary	FPI Flows Primary	FPI Flows Equity	FPI Flows Debt/Hybrid	Overall FPI Flows
Calendar 2022 (₹ Crore)	(146,048.38)	24,608.94	(121,439.44)	(11,375.78)	(132,815.22)
Calendar 2023 (₹ Crore)	1,27,759.75	43,347.14	1,71,106.89	65,954.38	2,37,061.27
Jan-2024 (₹ Crore)	(28,863.89)	3,120.34	(25,743.55)	19,150.21	(6,593.34)
Feb-2024 (₹ Crore)	(3,194.72)	4,733.60	1,538.88	30,277.95	31,816.83
Mar-2024 (₹ Crore)	29,152.54	5,945.78	35,098.32	16,987.88	51,996.20
Apr-2024 (₹ Crore)	(23,331.04)	14,659.77	(8,671.27)	(7,588.75)	(16,260.02)
May-2024 (₹ Crore)	(30,613.87)	5,027.54	(25,586.33)	12,675.47	(12,910.86)
Jun-2024 (₹ Crore)	24,345.55	2,218.99	26,564.54	15,192.90	41,757.44
Jul-2024 (₹ Crore)	26,059.05	6,305.79	32,364.84	16,431.20	48,796.04
Aug-2024 (₹ Crore) #	(5,552.01)	12,872.13	7,320.12	18,173.17	25,493.29
Total for 2024 (₹ Crore)	(11,998.39)	54,883.94	42,885.55	1,21,210.03	1,64,095.58
For 2024 ($ Million)	(1,417.00)	6,580.82	5,163.82	14,556.22	19,720.04
# – Recent Data is up to August 31, 2024

Data Source: NSDL (Negative figures in brackets)

Here are some key takeaways from the summary of FPI flow numbers updated till the close of August 31, 2024.

1. For the last full calendar year 2023, the total net inflows into equities stood at ₹1.71 Trillion. This comprised of secondary market inflows of ₹1.28 Trillion and primary market (IPO) inflows of 0.43 Trillion. The net FPI flows into equity in 2023 at ₹1.71 Trillion more than offsets the net FPI outflow from equities of ₹1.21 Trillion in the year 2022. IPO flows were robust in both the years; 2022 and 2023.
2. What is the FPI flow story in year 2024 till date. As of the close of August 31, 2024, the FPIs were net buyers in India to the tune of ₹1,64,096 Crore. However, out of this net buying amount, ₹1,21,210 Crore (73.9%) came from debt market inflows, while equities saw net outflows of ₹42,886 Crore. Debt flows continue to be driven by index inclusion expectations. If you break up the ₹42,886 Crore of FPI net inflows into equity in 2024 till date, the secondary markets saw net outflows of ₹(11,998) Crore while the IPO markets saw net inflows from FPIs of ₹54,884 Crore. Equity IPOs and debt flows have been the standout feature of FY25, but it is actually asset allocation 101 at play.

FPIs have been ambivalent about Indian markets in 2024 which is not surprising considering big events like general elections, interim budget, full budget, geopolitical risks etc. The big question now is whether the Fed will restrict itself to just 25 bps rate cut on September 18, 2025 or get more aggressive to boost growth. While the CME Fedwatch is very positive and pencilling in rate cuts of 75-100 bps by end of 2024 and total rate cuts of 200-225 bps in the coming year 2025; the Fed is a lot more circumspect. Regarding FPI flows into India, the GDP and fiscal deficit numbers are impressive, but RBI needs to move quickly to bring down cost of funds. A 50 bps rate cut from current levels by the RBI can go a long way to please the FPIs and given the much needed support to India Inc.