Weekly Musings – FPI flows for week ended August 18, 2023

20 Aug 2023 , 09:07 AM

Firstly, there is a disclaimer. The week to August 18, 2023 was a truncated week with 1 trading holiday on Tuesday and 2 clearing holidays on Tuesday and Wednesday. While markets were closed on Tuesday for Independence Day, the clearing was also closed on Wednesday due to Parsi New Year. With just 3 days of full-fledged clearing and settlement, the overall volumes were supposed to be relatively tepid. In the prior week to August 11, 2023, FPI flows into Indian equities were positive at $641 million. 

In the latest week to August 18, 2023, the FPI flows into equities were approximately similar at $617 million. Of course, this was largely an outcome of a single day of trading in which more than $1 billion was infused into equities, largely due to the Adani GQG Partners deal. Of course, the FPI flows are nowhere as impressive as the previous months. Also, in the month to day in August, FPI flows into Indian equities are just a tad over $1 billion. This is contrast to the previous three months of May, June, and July 2023; when FPIs infused more than $5 billion in each of the months. But, more about that later!

Why did FPI flows into India slow down?

There is clear slowing of FPI flows in August. Against total FPI flows of $17 billion into Indian equities between May 2023 and July 2023, the month of August has just about seen $1 billion come into equities. Also, that is accounted entirely by the GQG infusion into Adani group companies. If that is removed, the FPI inflows into Indian equities in August would have either been flat or marginally negative. Here is what has pulled down the FPI flows in the latest month to August 2023. Let us look at the high frequency items first. 

• About 2 weeks, the problems for FPI flows began with the rating story. First, Fitch downgraded US debt a notch from AAA to AA+. This was followed by Moody’s downgrading small and mid-sized US banks, which looked the most vulnerable. These two data points resulted in investors suddenly turning risk-off as the flows gravitated out of emerging markets. Ironically, even as Fitch and Moody’s are downgrading the US debt, the flows are gravitating towards US treasuries as a safe haven. That has substantially hit flows into emerging markets, including India. 

   

• You cannot talk about India flows and not talk about the monster of consumer inflation. From a recent low of 4.25% in May 2023, the consumer inflation in India spiked to 4.815 in June 2023 and then to an intimidating figure of 7.44% in July 2023. This opens up a number of possibilities. This is likely to hit rural demand on one side while cost of borrowing will also go up due to tightness in liquidity. The current inflation again brings India real rates of interest to the negative zone and puts India at a disadvantage versus other economies in terms of attracting flows. Above all, weak monsoons and high inflation have negative repercussions for rural demand, at a time when the rural demand is just about showing green shoots of recovery. Rising oil prices is seen as another risk factor for FPI flows into India.

   

• Thirdly, we cannot wish away the fact that the Nifty has been struggling to cross above the 20,000 mark. In the last few weeks, the resistance of the Nifty has been getting progressively lower. First, the Nifty struggled at 20,000, then at 19,800 and then at 19,500 and now at 19,300. That has also dented the enthusiasm of FPIs to some extent.

   

• Lastly, the consistently weakening rupee is also a matter of concern. For example, rupee breached beyond Rs83/$ with ease as the RBI did not intervene too aggressively. Weak rupee means that the FPIs would earn less in dollar terms and will not be able to protect their dollar returns. That has been disconcerting for most of the FPIs.

So, it is a mix of factors spurring weak FPI flows in recent weeks. It remains to be seen if the FPIs come back to investing in India after a brief pause. However, the good news is that the longer term perspective of Indian equities still remains very attractive. So, what is it that FPIs are betting on? Firstly, the FPIs are betting on consumer oriented domestic sectors. It is long on domestic plays and short on global plays. At a more fundamental level, Indian GDP is expected to grow from $3.50 billion to $5.20 billion over the next 5-6 years. The GDP boost, combined with higher per capita incomes, will unleash huge purchasing power.

Macro FPI flow picture up to August 18, 2023

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

Calendar  Month	FPI Flows Secondary	FPI Flows Primary	FPI Flows Equity	FPI Flows Debt/Hybrid	Overall FPI Flows
Calendar 2022	(146,048.38)	24,608.94	(121,439.44)	(11,375.78)	(132,815.22)
Jan-2023	(29,043.32)	191.30	(28,852.02)	2,308.27	(26,543.75)
Feb-2023	(5,583.16)	288.85	(5,294.31)	1,155.19	(4,139.12)
Mar-2023	7,109.65	825.98	7,935.63	-2,036.42	5,899.21
Apr-2023	9,792.47	1,838.35	11,630.82	1,913.97	13,544.79
May-2023	38,093.11	5,745.00	43,838.11	4,491.44	48,329.55
Jun-2023	45,736.71	1,411.63	47,148.34	9,109.36	56,257.70
Jul-2023	37,292.82	9,324.94	46,617.76	1,359.32	47,977.08
Aug-2023 #	6,833.10	1,560.57	8,393.67	5,553.97	13,947.64
Total for 2023	1,10,231.38	21,186.62	1,31,418.00	23,855.10	1,55,273.10
# – August Data is up to 18th August

Data Source: NSDL (all figures are Rupees in crore). Negative figures in brackets

Forget the short term problems. The long term picture for 2023 still looks a lot more promising. Here is why. FPIs are clearly and decisively buyers in equity in the year 2023, although the enthusiasm in the last three weeks appears to have waned. The FPIs infusing $17 billion into Indian equities in 3 months has meant that FPIs are now net buyers in 2023 and the net flows have more than offset the portfolio outflows in calendar 2022. Against FPI outflows of Rs1.21 trillion from equities in calendar 2022, the first 8 months of 2023 have seen FPI infusion of Rs1.31 trillion, more than cancelling out the outflows in 2022.

That is the story even if you look at the combined flows of equity and debt from FPIs. Against net outflows of Rs1.33 trillion in 2022, the FPIs have infused Rs1.55 trillion overall into equity and debt in the first 8 months of August. Even debt has turned around from outflows in 2022 to inflows in 2023. 

Colour of daily FPI equity flows for last 4 rolling weeks

Each week we look at the last 4 rolling weeks data on FPI flows as it shows us a time series moving average of FPI flows. Check the table below for 4 weeks to August 18, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
24-Jul-23	-1,405.07	-1,405.07	-171.30	-171.30
25-Jul-23	230.51	-1,174.56	28.14	-143.16
26-Jul-23	2,854.80	1,680.24	348.96	205.80
27-Jul-23	1,130.96	2,811.20	137.94	343.74
28-Jul-23	-1,249.82	1,561.38	-152.43	191.31
31-Jul-23	1,252.35	2,813.73	152.27	343.58
01-Aug-23	-774.18	2,039.55	-94.13	249.45
02-Aug-23	25.65	2,065.20	3.12	252.57
03-Aug-23	-1,501.84	563.36	-181.96	70.61
04-Aug-23	216.64	780.00	26.19	96.80
07-Aug-23	66.39	846.39	8.02	104.82
08-Aug-23	2,251.98	3,098.37	272.16	376.98
09-Aug-23	-58.45	3,039.92	-7.06	369.92
10-Aug-23	996.94	4,036.86	120.38	490.30
11-Aug-23	2,048.64	6,085.50	247.31	737.61
14-Aug-23	-2,534.61	3,550.89	-306.18	431.43
15-Aug-23	0.00	3,550.89	0.00	431.43
16-Aug-23	0.00	3,550.89	0.00	431.43
17-Aug-23	8,643.48	12,194.37	1,041.99	1,473.42
18-Aug-23	-986.97	11,207.40	-118.73	1,354.69

Data Source: NSDL

The week to August 18, 2023 saw net FPI inflows of $617 million which is slightly reassuring after the FPIs had turned net sellers in equities about 2 weeks back. Here is what we read from the above table. 

• In the previous 3 rolling weeks, FPI infusion into Indian equities has been $641 million ($95 million), and $1,059 million, and $1,602 million. The latest week saw net FPI inflows of $617 million; albeit due to one deal between Adani group and the promoters. 

   

• If you look at the last 4 rolling weeks on a cumulative basis, total FPI flows into Indian equities were Rs11,207 crore or $1.35 billion. In the last 20 trading sessions, there have been 11 days of net buying, 2 days of holidays and 7 days of net selling. The story is gradually shifting in favour of the sellers.

What will drive FPI flows in coming weeks?

FPIs are likely to focus on 5 major data points as key drivers of the colour and quantum of flows into Indian equities. 

• The CME Fedwatch will be closely tracked. It has been gradually showing signs of hawkishness with a high probability of 2 more rate hikes. The minutes of the Fed clearly indicate that the FOMC will be aggressive on rates if inflation is not coming down.

   

• FPIs should be happy with the quarterly results. Sales grew at just about 6.5%, but Indian companies ex-BFSI grew net profits at over 44%. Strong gross margins amidst falling commodity prices are the right time to bet on the bottoming of quarterly numbers.

   

• Oil will continue to be focus for FPIs. Brent Crude tapered after touching a high of $87/bbl and then fell to $84/bbl on growth concerns. Oil is most likely to be in a range as insufficiency of demand is a major challenge for oil prices to go up.

   

• Don’t miss what is happening on the USDINR. Rupee weakened to its historically lowest point of 83.16/$ and that is likely to make FPIs cautious. The only good thing is that a strong dollar will limit oil rally, but that is small consolation for FPI flows.

   

• Finally, FPIs are going to be focused on some very critical data points. Firstly, there is the RBI MPC minutes coming out this week, which will give a picture of whether the RBI will hike rates ahead of October. Also, there is the US PCE inflation and US GDP second estimates coming out in the last week of August. All these data points will hold the key.

For now, the FPI game in India is about long on domestic plays and short on global plays. So, they stay positive on financials, capital goods, autos and FMCG. However, FPIs continue would be wary of IT and healthcare; being global plays. FPI flows are likely to slow, but unlikely to falter as the overall India story remains intact. The one big concern for FPIs would be the inflation surge, which is yet to be reined in.