Weekly Musings – FPI flows for week ended August 16, 2024

19 Aug 2024 , 08:15 AM

FPI QUERY 1 – WILL THE FED CUT RATES IN SEPTEMBER?

In the week to August 16, 2024, FPIs found themselves confronting three questions. The outcome was there in the numbers as the FPIs took out $926 Million from Indian equities in the week. The negative trend of the previous two weeks continued. The primary concern for the FPIs is whether the US Fed would cut its interest rates in the September FOMC  meeting. The CME Fedwatch appears to think so, but as we have seen in the past, the Fed is normally driven less by market sentiments and more by hard numbers and cold evaluation.

During the latest week, the US announced the consumer inflation for July 2024 at 2.9%. That is 10 bps lower than the previous month. However, FOMC members like Raphael Bostic and Michelle Bowman in their speeches have expressed concerns that the time may not be ripe for rate cuts and it may be necessary to wait for longer. For instance, they are still unhappy with the pace at which the inflation is falling. The consumer inflation is still about 90 bps away from the target and oil prices continue to be a risk amidst West Asian tensions.

FPI QUERY 2 – ARE INDIAN STOCK VALUATIONS STRETCHED?

The second question that arises is whether the stock valuations are stretched in India. In the last one year, the Nifty has gained close to 25%, but the earnings have not kept with that pace of growth. In fact, Q1FY25 marked one of the slowest pace of growth in profits. Several sectors like banks, IT companies, FMCG and even capital goods are facing headwinds where the valuations have run up too much and the profit growth visibility is not that encouraging.

Today, the Nifty and the Sensex are not only trading at valuations that are much higher than the historical averages, but even the Buffett ratio of Market Cap to GDP is not giving comfort as it is well above 1.2X. This is the kind of valuations that India has normally seen around previous peaks and that is making investors slightly wary. Even in dividend yield terms, many of the sector are looking far from comfortable in terms of valuation. Above all, the Indian economy continues to be exposed to the headwinds of oil and commodity prices.

FPI QUERY 3 – THE WARREN BUFFETT FACTOR

In the recent week, Warren Buffett disclosed that he had nearly sold half his stake in Apple. Now, Apple was his largest and most profitable holding in the last few years and an exit from Apple can never be good news for investors. Of course, Buffett is talking about the US equity markets, but that is the one market that India has largely mirrored in the last one year. A question market over US equities would be a question mark over equities globally and the impact would be felt on Indian equities. However, that is not the full story.

What is really worry the FPIs in the Warren Buffett story is not just that he sold Apple. That could be a portfolio rebalancing decision. What is disconcerting for investors is that the greatest investors over the last 50 years is holding $277 Billion in hard cash and prefers to stay invested in treasuries, rather than look for equities. Buffett feels equity valuations are stretched. He may or may not be right; but considering his influence, it is surely impacting the sentiments of the FPIs in India too. In the midst of these 3 dilemmas, it was only obvious that the FPI flows were negative in the week to August 16, 2024.

MACRO FPI FLOW PICTURE UP TO AUGUST 16, 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) #	(32,684.55)	11,483.33	(21,201.22)	11,548.60	(9,652.62)
Total for 2024 (₹ Crore)	(39,130.93)	53,495.14	14,364.21	1,14,585.46	1,28,949.67
For 2024 ($ Million)	(4,651.61)	6,415.32	1,763.71	13,766.70	15,530.41
# – Recent Data is up to August 16, 2024

Data Source: NSDL (Negative figures in brackets)

FPIs continued to be aggressive net sellers in the week to August 16, 2024 at $(926) Million; almost comparable with $(1,479) Million in the previous week and much deeper than the selling of $(281) Million in the week before that. 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 $15,530 Million. Out of this figure, FPIs net bought equities worth $1,763.71 Million and were net buyers in debt worth $13,766.70 Million. For 2024, till date, net debt market inflows accounted for 88.6% 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 16, 2024, the FPIs were still net sellers in secondary market equities worth $(4,651.61) Million, while the buying in IPOs more than compensated for that at $6,415.32 Million.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to August 16, 2024, FPIs were net sellers to the tune of $(926) Million. FPIs have net sellers for 3 weeks in a row 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 consumer (CPI) inflation for July 2024 came in sharply lower at 3.54% as compared to 5.08% in the previous month. The inflation level of 3.54% is actually lower than the RBI target of 4%, which is the long term equilibrium target. However, this sharp fall in the consumer inflation can be largely attributed to the spike in the base inflation. This impact was most pronounced in the food basket, where July 2023 had seen the first signs of spike in food prices due to a bad monsoon and low Kharif output last year. Hence economists are cautioning not to take the CPI inflation figure of 3.54% in July too seriously as it may be more of a flash in the pan.
• Like the MOSPI declaring the Indian consumer inflation, the US Bureau of Labour Statistics (BLS) also declared the US consumer inflation for July 2024 during the week. The US consumer inflation came in 10 bps lower at 2.9%, which is still 90 bps away from the eventual Fed target of 2%. During the month, the food inflation was flat and the energy inflation was 10 bps higher compared to the previous month. However, the core inflation fell by 10 bps, leading to a fall in the US consumer inflation overall. Whether this results in a rate cut in September, is something to be watched.
• Like the India consumer inflation, even the India WPI inflation eased in the month from 3.36% to 2.04%. This 132 bps fall was largely on account of the higher base effect, and the sharp fall in the food and primary inflation. However, the real concern in WPI story may be on the manufacturing front. Remember, in WPI inflation, it is the manufactured products that has an imposing 64.2% weight and that inflation was actually higher in the month of July as compared to June. In fact, manufacturing inflation has been consistently going up in the last 3 months and this could be a precursor that cost pressures are building for Indian corporates. We have to wait and watch.
• India’s trade deficit widened to $23.5 Billion in the month of July 2024. The overall combined deficit picture also appears to be much higher than the previous year. There appear to be two factors at play. The supply chain constraints created by the unrest in the Red Sea is impacting the Indian exports to the US and Europe. At the same time, the imports are getting costlier due to higher freight and insurance costs. This has combined to spike the trade deficit significantly. The higher CAD as a percentage of GDP in FY25 could put pressure on the rupee. The immediate concern, however, is that over 70% of the trade deficit of the Indian economy for July is from China and Russia.
• There was some disappointment for the Indian economy on the IIP (index of industrial production) front. For June 2024 (IIP is reported with a 1-month lag), the IIP growth was lower at 4.24%, compared to 5.91% in May 2024. But the real concern was that the lower growth came despite a lower base, which actually accentuates the fall in the IIP. Compared to May, mining output was higher, but there was pressure on manufacturing output and also on electricity. This raises question on whether manufacturing can continue to drive the GDP growth in the coming quarters. For that, we have to await the first signals from Q1 GDP in the last week of August 2024.
• The one news that one cannot ignore is the fact that Warren Buffett is sitting on $277 Billion in cash. He prefers to park his funds in US treasuries rather than putting money into equities at the current valuations. Buffett has always been sceptical about the tech sector, which is why his decision to sell half of his Apple stake has attracted attention. To be fair, some of his recent decisions like buying IBM and US airline companies ended up quite badly. He was late on Apple and continues to miss out on tech trends, including the recent stories like Tesla and NVIDIA. However, Buffett sitting on so much cash, is never an encouraging sign for global investment managers.

The coming week could be more about the key central bank minutes coming from the US Fed and the RBI.

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
22-Jul-24	1,824.07	1,824.07	218.09	218.09
23-Jul-24	8,346.73	10,170.80	997.63	1,215.72
24-Jul-24	-1,548.64	8,622.16	-185.10	1,030.62
25-Jul-24	-3,508.22	5,113.94	-419.13	611.49
26-Jul-24	-2,197.79	2,916.15	-262.56	348.93
29-Jul-24	4,269.26	7,185.41	509.90	858.83
30-Jul-24	-2,726.36	4,459.05	-325.59	533.24
31-Jul-24	-2,865.96	1,593.09	-342.27	190.97
01-Aug-24	-2,853.76	-1,260.67	-340.78	-149.81
02-Aug-24	1,826.35	565.68	218.14	68.33
05-Aug-24	-3,367.22	-2,801.54	-402.12	-333.79
06-Aug-24	-3,692.07	-6,493.61	-440.38	-774.17
07-Aug-24	-3,024.79	-9,518.40	-360.49	-1,134.66
08-Aug-24	-2,841.65	-12,360.05	-338.49	-1,473.15
09-Aug-24	521.65	-11,838.40	62.13	-1,411.02
12-Aug-24	-1,161.33	-12,999.73	-138.42	-1,549.44
13-Aug-24	-2,811.08	-15,810.81	-334.77	-1,884.21
14-Aug-24	-1,419.70	-17,230.51	-169.08	-2,053.29
15-Aug-24	0.00	-17,230.51	0.00	-2,053.29
16-Aug-24	-2,377.62	-19,608.13	-283.26	-2,336.55

Data Source: NSDL

FPIs were net sellers for the third 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 $(1,479) Million, $(281) Million, net inflows of $349 Million, $1,845 Million, $885 Million, $953 Million, and $1,724 Million. In the latest week to August 16, 2024 net FPI equity outflows were $(926) Million.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from equities were to the tune ₹(19,608) Crore or $(2,337) Million. This number had been in the positive for over 8 weeks; before it has turned negative in the latest week.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

The last few weeks have been action packed. There was the Union Budget, key data flows, and the Fed policy statement. In the coming week, three factors are likely to impact the FPI flows in India.

• A lot will depend on the outcome of the Jackson Hole Symposium of global central bankers from August 22 to August 24, 2024. Normally, the symposium is used to debate on crucial issues facing the global monetary system and also how to align monetary policy globally to reduce the disruptions.
• The second big focus area would be the minutes of the FOMC and the RBI coming out in this week. While the policy statements give the gist of the decisions, it is the minutes that provide the gist of the discussions. In fact, the minutes are normally a lot more useful in gauging the future trajectory of rates.
• Finally, in the last week of August, there are some important data updates coming in. India Q1FY25 GDP will be announced and markets will be keen to see if the momentum is maintained. Also, the US data points on PCE inflation and Q2 GDP data will be the key.

FPI flows are still in a state of flux. Hopefully, the data flows by end of August 2024 should give it better direction.