Weekly Musings – FPI flows for week ended August 09, 2024

12 Aug 2024 , 11:22 AM

FPI DILEMMA 1 – WHAT WILL BE THE ACTUAL IMPACT OF BUDGET

In the week to August 09, 2024. The FPIs found themselves confronting three dilemmas. The result was there in the numbers as the FPIs took out $1.49 Billion from Indian equities in the week. The negative trend of the previous week not only continued, but also became sharper. Let us now talk about the first dilemma faced by FPIs. The budget impact is still not too clear, but the immediate concern is that there may be some concerns for the longer haul. The rates of long term capital gains tax and the short term capital gains tax on equities were increased in the budget to 12.5% and 20% respectively.

In addition, the STT rates on futures and options saw a steep increase. This was expected to put pressure on investor margins by making hedging more expensive. But, above all, the FPIs are genuinely worried that the fiscal situation may not be as comfortable as the budget makes it appear. While the finance minister has cut the rate of fiscal deficit target for FY25 to 4.9% of GDP, a higher food subsidy bill and higher allocations for Bihar and Andhra Pradesh are pressure points.

FPI DILEMMA 2 – WILL THE US SLOWDOWN SPOOK EQUITY AS AN ASSET CLASS

The FPI slowdown theory may have been built on very short term and high frequency data, but most investors have reasons to believe that eventually the US economy will have to pay the price of a long battle against inflation. That price will be in the form of pressure on growth. The first signs were there 2 weeks back when there was a visible worsening of the unemployment situation, which shot up to 4.3%. It is looking like a hard landing finally.

There are two possible outcomes of this data. Firstly, it is just one data point, so we need a trend. But, assuming that this is secular data, there could be two possible reactions. Firstly, the Fed may choose to ignore minor variations and stick to its one rate cut by December stance. The other possibility is that the Fed may go ultra-aggressive and cut rates aggressively. The FPIs are more concerned about the latter option as it leads to a sudden weakening of the dollar and could have a deep impact on FPI investing economics in India.

FPI DILEMMA 3 – HOW BAD CAN THE YEN CARRY TRADE CRISIS GET?

The Yen carry trade still remains the X-factor. Yen carry trade matters because most of the big prop desks that trade in the Indian derivatives market through the arbitrage route, use the yen carry trade to allocate funds to India. Essentially, they borrow at low raters in Yen and deploy it in EMs, including India. That was find as long as the yen was steady, but that does not appear to be the case any longer. The Yen is appreciating and appreciating hard.

It means that when these borrowers repay the yen loan, they have to pay extra to the tune of the Yen appreciation. In some cases, the yen has appreciated more than 10% against the currency, and even though these gains have tapered of late, the yen is still much stronger than what it was about a couple of months back. With the BOJ embarking on a hawkish policy, the Yen could only get stronger, so either yen trade gets more volatile or FPIs have to stop the yen carry trade altogether for the time being. In the midst of these 3 dilemmas, it was only obvious that the FPI flows were negative in the week to August 09, 2024.

MACRO FPI FLOW PICTURE UP TO AUGUST 09, 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) #	(23,030.66)	9,599.17	(13,431.49)	6,387.28	(7,044.21)
Total for 2024 (₹ Crore)	(29,477.04)	51,610.98	22,133.94	1,09,424.14	1,31,558.08
For 2024 ($ Million)	(3,501.69)	6,190.93	2,689.24	13,151.71	15,840.95
# – Recent Data is up to August 09, 2024

Data Source: NSDL (Negative figures in brackets)

FPIs turned aggressive net sellers in the week to August 09, 2024 at $(1,479) Million, which is much deeper than the selling of $(281) Million in the previous week. Interestingly, FPIs had been net buyers in equity 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 7 weeks prior to that. For calendar 2024 so far, FPIs were net buyers to the tune of $15,841 Million. Out of this figure, FPIs net bought equities worth $2,289.24 Million and were net buyers in debt worth $13,151.71 Million. For 2024, till date, net debt market inflows accounted for 83.02% of total net FPI flows into India. Year 2024 has been more about debt flows and less about equity flows; with the dominance of debt flows increasing over the previous week. As of the close of August 09, 2024, the FPIs were still net sellers in secondary market equities worth $(3,501.69) Million, while the buying in IPOs more than compensated for that at $6,190.93 Million.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to August 09, 2024, FPIs were net sellers to the tune of $(1,479) Million. FPIs turned net sellers last week, after being net buyers for 7 weeks in a row, and infusing $9.04 Billion into Indian equities. Here is what drove FPI sentiments this week.

• The big news in the week was the RBI policy statement. The RBI, as expected, maintained status quo on the rates front and also maintained the stance of the RBI policy as withdrawal of accommodation. There were expectations that the RBI may move to a neutral stance, but with inflation still high, the RBI obviously did not want to take any chances. This keeps the repo rates at 6.50%, the SDF rate at 6.25% and the MSF / Bank rate at 6.75%. Like in the June policy, two members viz., Jayanth Varma and Ashima Goyal voted for a 25 bps reduction in rates and changing the stance of the policy to neutral. However, both these members will retire after the August meeting, so there may not be too many voices of dissent left in the MPC in the October meet.
• Another important variable tracked in the RBI policy statement was the projection for the full year inflation and full year GDP for FY25. In the June meeting, the RBI MPC had kept the inflation static at 4.5%, but had raised the GDP growth estimate by 20 bps to 7.2%. In the August policy meet, it was expected that while the GDP estimate would remain static, the RBI may raise the inflation estimate, considering that the average inflation in the first few months has been closer to 5%. However, the RBI opted to keep status quo on inflation at 4.5% and GDP growth at 7.2%. The bet on inflation was that it would taper from the end of second quarter onwards.
• The Hindenburg saga is not going away quietly and this time they are targeting the SEBI chair. However, Hindenburg has lost most of its credibility after it made a big noise in the Adani case but could really prove nothing regarding the grossly wild allegations made in early 2023. Even in the latest case, the entire allegations have come about after SEBI issued a show cause notice to Hindenburg Research in the Adani case. The weakens the case. Meanwhile, the SEBI chair has denied the allegations as being slanderous and has agreed to make all requisite information public.
• Oil saw a late spike in the week as it spiked in the Brent market from $76/bbl to close to $80/bbl. There are two diverse factors at play. On the one hand, the rising geopolitical tensions in the Middle East and the possibility of an all-out war between Iran and Israel is keeping oil prices on the boil. On the other hand, two of the largest economies in the world are fighting hard to grow. China has been struggling to revive growth for quite some time, while the US slowdown is a recent problem. These fears have been sparked by the weaker than expected labour data in the US. Between these contrarian forces, the oil prices have remained in a tight range.
• Mutual fund flows in July was very robust with debt funds seeing inflows of ₹1.20 Trillion and over ₹37,000 Crore of net inflows into equity funds. Apart from the equity funds, even the hybrid funds and passive funds also saw strong inflows. But the more important trigger was the funnel for these flows. For July 2024, the SIP inflows touched a record₹23,332 Crore, while the NFO flows came in at ₹16,565 Crore. These factors have ensured that even if FPI flows taper, there is enough ammunition in domestic funds to sustain the interest in the markets. Ironically, a strong domestic support system for markets is also positive for FPI flows.
• There are some stern warnings coming from the RBI governor and the Finance Minister that many of the Indian banks may be running the risk of asset liability mismatch in their balance sheets. In the last few quarters, the growth in credit has been much faster than the growth in deposits, which took the credit / deposit ratio to its highest level ever. That has forced banks to rely on the certificates of deposit to raise funds. RBI governor and the finance minister have raised concerns over this trend as it leads to funding long term assets with short term liabilities; a classic ALM challenge. Both the RBI governor and FM want the banks to focus on household deposits, but that is going to be easier said than done.

The week was about the RBI monetary policy and the coming week is likely to see a slew of data points on inflation, industrial growth, and international trade.

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
15-Jul-24	5,367.76	5,367.76	642.55	642.55
16-Jul-24	3,337.89	8,705.65	399.44	1,041.99
17-Jul-24	0.00	8,705.65	0.00	1,041.99
18-Jul-24	1,660.80	10,366.45	198.71	1,240.70
19-Jul-24	5,052.87	15,419.32	604.12	1,844.82
22-Jul-24	1,824.07	17,243.39	218.09	2,062.91
23-Jul-24	8,346.73	25,590.12	997.63	3,060.54
24-Jul-24	-1,548.64	24,041.48	-185.10	2,875.44
25-Jul-24	-3,508.22	20,533.26	-419.13	2,456.31
26-Jul-24	-2,197.79	18,335.47	-262.56	2,193.75
29-Jul-24	4,269.26	22,604.73	509.90	2,703.65
30-Jul-24	-2,726.36	19,878.37	-325.59	2,378.06
31-Jul-24	-2,865.96	17,012.41	-342.27	2,035.79
01-Aug-24	-2,853.76	14,158.65	-340.78	1,695.01
02-Aug-24	1,826.35	15,985.00	218.14	1,913.15
05-Aug-24	-3,367.22	12,617.78	-402.12	1,511.03
06-Aug-24	-3,692.07	8,925.71	-440.38	1,070.65
07-Aug-24	-3,024.79	5,900.92	-360.49	710.16
08-Aug-24	-2,841.65	3,059.27	-338.49	371.67
09-Aug-24	521.65	3,580.92	62.13	433.80

Data Source: NSDL

FPIs were net sellers for the second week in a row, after being net buyers for 7 weeks prior to that and infusing $9.04 Billion. Here are some key FPI data takeaways.

• In previous 7 rolling weeks, FPIs saw net outflows of $(281) Million, net inflows of $349 Million, $1,845 Million, $885 Million, $953 Million, $1,724 Million, and $1,825 Million. In the latest week to August 09, 2024 net FPI equity outflows were $(1,479) Million.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI inflows into equities were at just ₹3,581 Crore or $434 Million. This number has been in the positive for over 7 weeks now; although is getting closer to being in the negative.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

In the last two weeks, most FPIs are done with the pros and cons of the full budget. The consensus is, the budget may have its ups and downs, but is still in sync with the India growth story. In the current week, the RBI policy was relatively ambivalent, so it is not clear if the FPIs read anything into it. However, the factors that have been roiling FPI sentiments in the last two weeks are the geopolitical situation in the Middle East & West Asia, fears of a distinct slowdown in the US economy, China’s struggle for reviving growth, and the short term consequences of the unwinding of the yen carry trade. What about the coming weeks?

In the next few weeks, the big focus would be on how inflation pans out in the US. The markets will be looking at the US consumer inflation to be announced next week and the PCE inflation to be announced towards the end of the month. These would be some of the key data points that will decide the trajectory of the Fed in September. Above all, the focus will also be on whether the GDP gets upgraded or downgraded. As a lead indicator, the US labour data will be critical as it was the labour that had weakened sharply about two weeks back, leading to fears of a US slowdown. That would be the focus area for FPIs.