FII assets under custody (AUC) in India at $1 Trillion for first time

7 Oct 2024 , 04:09 AM

BIG NEWS – FPI AUC AT RECORD $1 TRILLION

FPI assets under custody (AUC) in India touched $1 Trillion for the first time since FPIs were allowed to invest in India in 1991. Assets under custody is a very good measure of how a country figures in the overall FPI scheme of things. In the last few months, India has emerged as the second largest player in the MSCI EM index with a weightage of close to 20%. It was obvious that it would result in a tremendous influx of FPI funds into India. Not only did FPI debt flows into India pick up rapidly, even equity flows have been robust. One can argue that AUC is a combination of flows and index accretion. That is true, but it still is the best proxy of how important the economy and the market is for the FPIs.

Now for the granular story. For the month of September 2024, FPIs infused $6.88 Billion into Indian equities. But that is just a part of the bigger picture. We will deal with the FPI flows into equity later. The big cause of celebration is that in September 2024, the FPI AUC in India touched $1 Trillion across asset classes. Of course, it is still equities that dominate. For example, as of the close of September 2024, out of the $1.01 Trillion in assets under custody, $930.47 Billion was from equities, $68.72 Billion of AUC from debt, and the balance of $8.11 Billion from hybrids and other asset classes; adding up to $1.01 Trillion AUC overall. Out of the $68.72 Billion of AUC in debt, sovereign debt accounted for more than half at $36.02 Billion as of the close of September 2024. Now for the FPI equity flow story.

FPIS NET BUY $6.88 BILLION IN SEPTEMBER 2024

The month of September 2024 was a very robust month in terms of FPI flows into equity, compared to the previous 3 months. 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. In August, the net inflows were relatively modest at $876 Million. However, September saw FPIs back with a bang, infusing $6.88 Billion into Indian equities. In September 2024, the FPIs were decisive buyers in the first half and the second half of the month. In the first half of September, FPIs were net buyers to the tune of $3.32 Billion, while they net bought $3.56 Billion in equities in the second half of September. Clearly, the above average monsoons and the Fed rate cuts has made FPIs bullish on India.

While the weak unemployment data in the US had been a concern for the FPIs, the Fed decision to front load rate cuts by 50 bps appeared to please global investors. A weak dollar means that FPIs would automatically look at EMs like India more favourably. There were just two concerns for the FPIs in India. Firstly, the geopolitical situation in West Asia has been worsening and that is likely to impact India with its strong trade links with the GCC region. Secondly, current account deficit figure at 1.1% of GDP hinted at trade pressures mounting. In terms of sectoral flows; BFSI, healthcare, realty and FMCG dominated FPI inflows in the month of September 2024. Autos and IT were under pressure with signs of FPI selling.

FACTORS THAT INFLUENCED FPI FLOWS IN SEPTEMBER 2024

There were 5 factors that had an impact on the FPI flows in the month of September 2024.

• The Fed policy decision to cut rates by 50 bps showed a clear intent to front load rate cuts. The meeting also saw the first dissent vote 19 years; as Michelle Bowman expressed her dissatisfaction at the 50 bps rate cut. However, the markets were pleased by the aggression, and also the trajectory of another 50 bps rate cut in 2024.
• The much awaited monsoons in India have been reported at 107% of the long period average (LPA). That implies a bumper Kharif crop this year, higher foodgrain output and better control over food prices. Lower food inflation is positive for India sentiments.
• The worsening geopolitics in the Middle East did make some FPIs cautious but the rush by passive funds for index adjustments was quite strong. With India having Russia as a fall-back oil supplier; the Middle East should be less of a concern for Indian economy.
• The two key data points in the US towards the end of September were positive for the FPI sentiments. The PCE inflation came in sharply lower at 2.2%, compared to 2.5% in the previous month. Ironically, core inflation has actually gone up by 30 bps in the last 2 months. FPIs should be pleased that US inflation is getting close to the 2% target. GDP growth at 3.0% for Q2-2024 means hard landing may not be an issue for US economy.
• There were two data points in India that could intimidate the FPIs. Firstly, India current account deficit for Q1 came in sharply higher at $9.7 Billion while the core sector growth for August dipped into negative for the first time in 42 months. The slowdown in capex by the government appears to be having an impact on the core sector output.

The turnaround in FPI flows, which started in the second half of August, seems to have continued all the way to the end of September 2024.

FPI AUC SCALES RECORD $930 BILLION IN SEPTEMBER 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 September 2024, the FPI AUC has gone from under $800 Billion to $930 Billion. However, if you compare the current AUC with the pervious peak AUC of $667 Billion in October 2021, it is a good 39.5% higher. Here is a quick MOM comparison of FPI AUC

Industry Group	FPI AUC (Sep 2024) ($ Billion)	FPI AUC (Aug 2024) ($ Billion)
Financials (BFSI)	258.91	246.55
Information Technology (IT) Services	83.94	86.46
Oil & Gas	74.47	76.40
Automobiles and Auto Components	73.41	70.55
Healthcare and Pharmaceuticals	58.61	56.04
Fast Moving Consumer Goods (FMCG)	58.23	55.95
Capital Goods	49.31	48.40
Consumer Services	42.21	40.22
Power (generation and transmission)	40.43	38.38
Telecommunications	36.54	35.12
Consumer Durables	29.54	27.36
Metals and Mining	27.68	25.62
Realty	20.22	18.76
Services	19.37	19.43
Construction	17.33	17.43
Cement	15.84	15.35
Chemicals	14.98	14.29
Top 17 Sectors	921.02	892.28
Other 6 sectors	9.45	8.34
Total FPI AUC	930.47	900.62

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 September 2024. NSDL has pruned the list of sectors to 23. Out of these 23 sectors, the AUC of the top-17 sectors accounted for 98.98% of total FPI AUC of $930.47 Billion. In September 2024, the overall FPI AUC, including equity, debt, and hybrids crossed the $1 Trillion mark for the first time ever.

What about the components of AUC as of September 2024. At $258.91 Billion, BFSI continues to dominate the AUC stakes, despite the weight of BFSI in the indices coming down. The AUC of financials accounts for 27.83% 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 September 2024, positive accretion was seen in BFSI, Healthcare, Capital Goods, FMCG, and Metals. AUC pressure was visible in IT, oil & gas, and construction.

BFSI LEADS THE RACE IN SEPTEMBER 2024 FPI BUYING

In September 2024, FPIs were net buyers of $6.88 Billion in Indian equities. Not surprisingly, there were several sectors that saw strong positive net flows from FPIs in the month. If you sum up the positive flow sectors, they added up to $7.82 Billion, while the negative flow sectors added up to $0.94 Billion. In the $6.88 Billion of net FPI inflows, the positive flows were indisputably dominant.

FPI Net Buying in Sectors	H1-Sep-24 ($ Million)	H2-Sep-24 ($ Million)	Sep-24 ($ Million)
Banking & Financial Services (BFSI)	1,460	1,784	3,244
Healthcare	435	356	791
Realty	346	295	641
Fast Moving Consumer Goods (FMCG)	163	421	584
Others	292	243	535
Capital Goods	212	265	477
Consumer Durables	265	180	445
Telecommunication	202	28	230
Services	-50	256	206

Data Source: NSDL

The top 5 sectors that saw net inflows from FPIs were BFSI, Healthcare, Realty, FMCG and miscellaneous. BFSI flows were back with a bang in the month after it became clear post the labour data that the Fed would ease rates and even front-load them. Healthcare continued to see a lot of defensive buying while Realty and FMCG were more of a play on the consumer sectors in India. If you look at the sectors getting positive flows in September 2024, there is a predominance of consumer plays with the FPIs betting big on revival in rural demand in India, post the strong monsoon indications this year.

CONSUMER SERVICES, IT, AUTOS SEE FPI SELLING IN SEPTEMBER

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

FPI Net Selling in Sectors	H1-Sep-24 ($ Million)	H2-Sep-24 ($ Million)	Sep-24 ($ Million)
Consumer Services	-19	-332	-351
Automobiles & Ancillaries	-236	-15	-251
Information Technology (IT)	+6	-151	-145
Construction Materials	-47	-61	-108
Oil & Gas	+199	-276	-77

Data Source: NSDL

In a month, when the FPIs were net buyers to the tune of a mere $6.88 Billion, the selling was bound to be limited, which was the case. However, there were some interesting test cases in September. Autos came under selling after a persistent rally in the last few months. However, the selling in autos was prominent in the first half of September but relatively neutral in the second half. IT saw selling pressure after the US cut rates aggressively, interpreting it as a sign of growth pressures. FPIs were concerned that any slowdown in the US could hit tech spending and also the pricing power of tech companies. Oil & gas had a good first half, but the selling became intense in the second half of September after the rising geopolitical tensions in the Middle East and West Asia.

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
Sep-2024 (₹ Crore)	46,552.40	11,171.24	57,723.64	35,813.99	93,537.63
Oct-2024 (₹ Crore) #	(30,555.93)	3,413.76	(27,142.17)	4,040.75	(23,101.42)
Total for 2024 (₹ Crore)	3,998.08	69,468.94	73,467.02	1,61,064.77	2,34,531.79
For 2024 ($ Million)	497.22	8,231.46	8,818.68	19,310.23	28,128.91
# – Recent Data is up to October 04, 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 October 04, 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 October 04, 2024, the FPIs were net buyers in India to the tune of ₹2,34,532 Crore. However, out of this net buying amount, ₹1,61,065 Crore (68.7%) came from debt market inflows, while equities saw net outflows of ₹73,467 Crore. Debt flows continue to be driven by index inclusion expectations. If you break up the ₹73,467 Crore of FPI net inflows into equity in 2024 till date, the secondary markets saw net inflows of ₹3,998 Crore while the IPO markets saw net inflows from FPIs of ₹69,469 Crore. Equity IPOs and debt flows have been the standout feature of FY25. Even as the undertone of asset allocation is shifting to debt, one key trend is that the total FPI flows in the first 9 months of 2024, are almost equal to the full year FPI inflows in calendar 2023. The credit for that goes to debt market flows.

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, volatile US jobs data, rate cuts, trade concerns etc. The Fed has set the ball rolling with its 50 bps rate cut and a clear signal that it is prepared to front load rate cuts to give an aggressive message to the market. The members of the Fed appear to agree on the point that they cannot afford to delay the rate cuts, the same way they had delayed the rate hikes back in 2021. For the FPIs, there will be 3 considerations at play. Firstly, as long as the Fed remains dovish, it is positive for global liquidity flows and that is positive for FPIs. Secondly, the Fed dovishness is likely to make the dollar weaker, a typical sweet spot for the entry of FPIs into emerging markets like India. Lastly, FPIs will be keen to figure out how the RBI will react; and whether it will prefer to chart its own course or just avoid the risk of monetary divergence. The coming week may offer a few key answers!