Weekly Musings – FPI flows for week ended August 02, 2024

2 Aug 2024 , 09:34 PM

THE BUDGET LAG EFFECT CONTINUES

In the previous week to July 26, 2024, FPI sentiments had soured in the second half post the budget. That lag effect continued this week as FPIs ended the week net selling $(281) Million in Indian equities. The latest week of selling comes after 7 consecutive weeks of buying, in which the FPIs had infused $9.04 Billion into Indian equities. In comparison, the selling is quite small, so we need to see if this trend continues  or it is just a flash in the pan. In the last 7 weeks, FPIs were net buyers of $349 Million, $1.85 Billion, $885 Million, $953 Million, $1.41 Billion, $1.83 Billion, and $1.72 Billion . FPIs had infused $9.04 Billion in last 7 weeks since the formation of the Modi 3.0 government. For the first time after 7 weeks, the current week to August 02, 2024 saw net selling to the tune of $281 Million.

While the Budget lag effect was a factor, there were other risk factors too. First, a quick recap of the Union Budget measures. The FPIs did interpret the budget as being unfriendly to markets. Budget had raised STT on F&O and had also raised the rate of tax on long term capital gains and short term capital gains on equities. These were sentiment dampeners. On the macro front, the government did not increase the capex allocation, despite the ₹2.11 Trillion dividend largesse from the RBI, although the budget did cut fiscal deficit target for FY25 from 5.1% to 4.9%. What the FPIs  were concerned was the ₹65,000 Crore allocation to the states of Bihar and Andhra Pradesh as part of the coalition Dharma. FPIs have never been comfortable with political compulsions encroaching on economic decisions.

GLOBAL ECONOMICS FINDS ITSELF IN A DILEMMA

The current global macroeconomic scenario appears to be caught between two extremes. On the one hand, there is the worsening geopolitical situation in the Middle East and West Asia. The so-called peace talks between Israel and Gaza have gone for a toss after Israel launched attacks on Hezbollah leaders in Beirut. Hezbollah is backed by Iran, just like Hamas and Houthis, and this latest move is only going to worsen tensions between Iran and Israel.

The question is; how much longer before the other nations in the GCC are also dragged into the conflict. For now, Saudi Arabia, UAE, Qatar, and Egypt have maintained a neutral stance. But after recent Al Jazeera statistics about the casualties caused by Israel went public, it is going to be a lot tougher to remain neutral for Arab nations. Even as geopolitics gets more convoluted, the other concern is the distinct signs of slowdown in China. Today, the world needs China to recovery quickly. In terms of impact, the latter can be more severe.

MACRO FPI FLOW PICTURE UP TO AUGUST 02, 2024

The table captures monthly FPI flows into equity and debt for 2022, 2023, and 2024.

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) #	(1,048.27)	20.86	(1,027.41)	3,475.32	2,447.91
Total for 2024 (₹ Crore)	(7,494.65)	42,032.67	34,538.02	1,0,512.18	1,41,050.20
For 2024 ($ Million)	(880.36)	5,048.95	4,168.59	12,804.41	16,973.00
# – Recent Data is up to August 02, 2024

Data Source: NSDL (Negative figures in brackets)

FPIs turned net sellers in the week to August 02, 2024 at $(281) Million after being net buyers to the tune of $349 Million, $1,845 Million, $885 Million, $953 Million, $1,724 Million, $1,825 Million, and $1,405 Million in the previous 7 weeks. For calendar 2024 so far, FPIs were net buyers to the tune of $16,973 Million. Out of this figure, FPIs net bought equities worth $4,168.59 Million and were net buyers in debt worth $12,804.41 Million. For 2024, till date, net debt market inflows accounted for 75.4% of total net FPI flows into India. In short, year 2024 has been more about debt flows and less about equity flows; although the dominance of debt flows has fallen from above 95% to around 75%. As of the close of August 02, 2024, the FPIs were still net sellers in secondary market equities worth $(880.36) Million, while the buying in IPOs more than compensated for that at $5,048.95 Million.

As far as the FPI triggers are concerned, most of the domestic triggers like political equations and the full budget are done and dusted. Inflation still remains a question mark, but that is largely under control. The one thing that the FPIs would be keenly awaiting is the September Fed meet, when it is expected to implement the first rate cut. It is expected that, once the rate cut happens, then flows to emerging markets could actually gather pace. Here is a quick look at how some of the key news flows impacted FPI sentiments this week.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to August 02, 2024, FPIs were net sellers to the tune of $(281) Million. FPIs turned net sellers, after being net buyers for 7 weeks in a row, and infusing an imposing sum of $9.04 Billion into Indian equities. Here is what drove FPI sentiments this week.

• The big news in the week was the Fed policy statement, which maintained status quo on rates, along expected lines. However, in his post policy interaction with the press, Jerome Powell made the first admission that the Fed could implement its first rate cut as early as the upcoming Fed meeting in September. However, the CME Fedwatch is a lot more optimistic and is pencilling in 2 to 3 rate cuts by the end of 2024 and up to 7 rate cuts by the end of year 2025. This is despite Jerome Powell cautioning markets not to expect more than one rate cut in the current calendar year.
• The geopolitical situation in the Middle East and West Asia worsened in the week with Israel launching concerted attacks on Hezbollah leaders. This comes at a time when mediating countries like Egypt and Qatar were trying hard to resolve the stalemate in West Asia by getting Israel to announce a ceasefire. However, Israel continued its targeted attacks on rebel leaders in the region and that has only worsened the geopolitics in the Middle East. The concerns in the region aggravated after Al Jazeera published  reports of the number of casualties caused by Israel. This remains a tinder box for now and could have larger implications for global markets.
• In one of the biggest GST notices issued to an Indian company, a GST recovery notice of over ₹32,400 Crore was sent to Infosys. The allegation was that Infosys had shown supplies transferred by global offices as operating expenses of the branch, while such a payment should have ideally attracted GST. This notice refers to the period from 2017 onwards. Ex managers of Infosys called it tax-terrorism, while Infosys has maintained that it has adhered to the law. In a turn of events, Karnataka state government withdrew this notice, but the centre plans to pursue this case. The notice is under the Reverse GST mechanism where GST should have ideally been paid by the recipient than the sender.
• India may be looking to withdraw its sovereign gold bond scheme during the current year and there would be no fresh issues after that. However, this is yet to be confirmed by the government. Several government officials had raised the concern that the cost of the SGB was more than the benefits that the government derived from SGBs. For instance, the government pays 2.5% interest on the face value of the bond, guarantees the SGB holdings in grams of gold, and also offers full exemption from capital gains tax if held for the full 8 years. The total of cash outflows, implicit costs and the revenue foregone was not proving to be a viable proposition for the government.
• The core sector growth for June 2024 came in at 3.95%; lower than recent months. This was largely on account of a sharp 320 bps spike in the base. If one looks at the break-up of the 8 core sectors, 6 sectors showed positive growth while contraction was seen in oil extraction and refinery products. Since refinery products has a weightage of 28.04%, the impact on core sector got magnified and it came in lower than expected. The sharp fall in refinery output was on account of weak gross refining margins (GRMs). On the upside, coal output led the way with 14.25% growth in June 2024. This sector has seen robust output in last one year on frenetic demand growth from thermal power sector.
• The India fiscal deficit update as of the close of June 2024, came in at 8.1% of full year target. That may sound too good to be true, but there are two things to remember. The data is based on the old fiscal deficit level of ₹16.85 Trillion, but the full budget had reduced it to ₹16.13 Trillion. The actual fiscal deficit would be 8.4% of annual target and not 8.1%. That is still low and the reason is the RBI dividend of ₹2.11 Trillion accounted for fully in May 2024. One can expect the fiscal deficit to pick up in the coming months, as the food subsidy bill starts to grow with the Kharif cropping season gathering steam.
• In a temporary reprieve, Byju Raveendran has managed to retain control of Byju’s by getting into an out-of-court settlement with BCCI. For now, the ownership of Byju’s does not pass on to the Insolvency Resolution Professional (IRP). However, Byju’s still needs to address the massive debt on its books amidst dwindling cash flows.

The week was largely predicated on the monetary policy statement and hopes of the first rate cut in September. However, geopolitical risk could be the proverbial joker in the pack.

DAILY FPI EQUITY FLOWS FOR LAST 4 ROLLING WEEKS

Here is the last 4 rolling weeks data on FPI flows as it shows us a time series moving average of FPI flows.

Date	FPI Flow (₹ Crore)	Cumulative flows	FPI Flow($ Million)	Cumulative flows
08-Jul-24	3,169.45	3,169.45	379.57	379.57
09-Jul-24	161.67	3,331.12	19.37	398.94
10-Jul-24	1,528.18	4,859.30	183.05	581.99
11-Jul-24	2,183.95	7,043.25	261.58	843.57
12-Jul-24	346.92	7,390.17	41.53	885.10
15-Jul-24	5,367.76	12,757.93	642.55	1,527.65
16-Jul-24	3,337.89	16,095.82	399.44	1,927.09
17-Jul-24	0.00	16,095.82	0.00	1,927.09
18-Jul-24	1,660.80	17,756.62	198.71	2,125.80
19-Jul-24	5,052.87	22,809.49	604.12	2,729.92
22-Jul-24	1,824.07	24,633.56	218.09	2,948.01
23-Jul-24	8,346.73	32,980.29	997.63	3,945.64
24-Jul-24	-1,548.64	31,431.65	-185.10	3,760.54
25-Jul-24	-3,508.22	27,923.43	-419.13	3,341.41
26-Jul-24	-2,197.79	25,725.64	-262.56	3,078.85
29-Jul-24	4,269.26	29,994.90	509.90	3,588.75
30-Jul-24	-2,726.36	27,268.54	-325.59	3,263.16
31-Jul-24	-2,865.96	24,402.58	-342.27	2,920.89
01-Aug-24	-2,853.76	21,548.82	-340.78	2,580.11
02-Aug-24	1,826.35	23,375.17	218.14	2,798.25

Data Source: NSDL

FPIs were net buyers for the seventh week in a row. With the political uncertainty coming to an end, this week was all about the Union Budget. Here are some key FPI data takeaways.

• In previous 7 rolling weeks, FPIs saw net inflows of $349 Million, $1,845 Million, $885 Million, $953 Million, $1,724 Million, $1,825 Million, and $1,405 Million. In the latest week to August 02, 2024 net FPI equity outflows were $(281) Million.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI inflows into equities were at ₹23,375 Crore or $2,798 Million. This number has been in the positive for over 6 weeks now. FPIs were net buyers in debt this week.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

In the last 8 trading sessions, most FPIs are done with the pros and cons of the full budget. The consensus is, perhaps, that in the overall analysis, it may not be all that bad. Last week, the Fed policy remained neutral, but now September rate cut looks very likely. That will be a great booster for FPI flows into EMs like India. But, there are big data points that FPIs will be watching this month. Apart from the inflation and IIP data, the first quarter GDP numbers will also be out towards the end of the month. That will be the first indication if India can repeat the feat of being the fastest growing large economy for fourth year in a row. That should be music to the ears of the FPIs.