Weekly Musings – FPI flows for week ended August 23, 2024

25 Aug 2024 , 08:40 AM

JACKSON HOLE: STORY BEHIND THE MONETARY NARRATIVE

The big event of the last week was the conclusion of the Jackson Hole Symposium at Wyoming. Organized by the Federal Reserve Bank of Kansas City each year since 1978, the Jackson Hole meeting has become like the Davos for central bankers. Here, the central bank chiefs from across the developed world deliberate on issues of interest and relevance to the global monetary system and monetary policy. This is also the forum where the central bankers take a call on greater alignment of monetary policy globally.

This year, it was the speech by Jerome Powell that was eagerly awaited by the markets. To be fair, Powell did not disappoint the markets. His statement that, “the time was ripe for the Fed to cut rates” was the best affirmation that the Fed intended to cut rates by 25 bps at the September FOMC meet. However, the more important part in his speech was his explanation of how the various intended and unintended triggers got together to help the US economy to manage inflation control without putting the US economy at the risk of a hard landing. Here are 3 very critical points made by Powell in this context.

• On a rather candid note, Powell admitted that while the Fed tightening played a role in reining in consumer inflation, without impacting growth, there were other factors that also assisted the Fed. To recap, the post-COVID distortions to supply and demand and the sharp shocks to energy and commodity markets, were some of the major drivers of high inflation. However, just as the supply chain issues started getting resolved, the reversal of the economic crisis ensured that the growth levers were not impacted. While the while Fed policy helped; the automatic adjustment of the supply chain constraints, the return of China to the mainstream, alternative sources of supply created etc were all major factors in the inflation coming down. The Fed’s restrictive monetary policy was certainly instrumental in moderating aggregate demand. However, the improvements in aggregate supply played a big role; and you can almost call that the Hand of God.
• Once again, Powell underlined at Jackson Hole that the Fed role has not only been in crimping aggregate demand, but also in managing inflation expectations. Let us first understand why this matters. Inflation expectations are a function of central bank policy. For example, if consumers are confident that the Fed would intervene and tame inflation by raising rates, then inflation expectations are automatically low. Otherwise, the inflation expectations could go up. When the inflation expectations are low, the consumer spending does not get negatively impacted; and that has ensured that GDP growth remains robust even in tough times. While it is hard to establish any causal relationships; intuitively one can say that inflation expectations played a big part.
• There finally appear to be a consensus that the inflation spike of 2021 and 2022 was an exceptional outcome of the collision between overheated and temporarily distorted demand and constrained supply. Now, most analysts, economists and even central bankers concur with that view. Even the experts, who had blamed the Fed for delaying rate hikes till March 2022, are attributing most of the incremental inflation to this collision. The US economy may not still be at 2% inflation, but the current journey gives the Fed ample confidence that inflation is on the right track.

Jerome Powell underlined in his Jackson Hole speech that the time was ripe for the first rate cut. However, the Fed in general, and Powell in particular, are not too keen to commit anything beyond that. Clearly, any further action on rate cuts will be purely based on incoming data only. That is largely unlike the optimism of the CME Fedwatch.

MACRO FPI FLOW PICTURE UP TO AUGUST 23, 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) #	(28,671.53)	12,366.77	(16,304.76)	13,234.73	(3,070.03)
Total for 2024 (₹ Crore)	(35,117.91)	54,378.58	19,260.67	1,16,271.59	1,35,532.26
For 2024 ($ Million)	(4,172.77)	6,520.58	2,347.81	13,967.85	16,315.66
# – Recent Data is up to August 23, 2024

Data Source: NSDL (Negative figures in brackets)

FPIs turned net buyers in the latest week to August 23, 2024, albeit to a subdued level of $584 Million only. However, that does come as a relief after the FPIs sold equities to the tune of $2.70 Billion in the previous 3 weeks. One can take solace from the fact that post the election outcome, the FPIs had infused $9.04 Billion over 5 weeks, so at the end of the day, India is still substantially better off.

For calendar 2024 so far, FPIs were net buyers to the tune of $16,316 Million. Out of this figure, FPIs net bought equities worth $2,348 Million and were net buyers in debt worth $13,968 Million. For 2024, till date, net debt market inflows accounted for 85.6% 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 lower than the previous week. As of the close of August 23, 2024, the FPIs were still net sellers in secondary market equities worth $(4,172.77) Million, while the buying in IPOs more than compensated for that at $6,520.58 Million.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to August 23, 2024, FPIs turned net buyers to the tune of $584 Million. FPIs were net sellers for 3 weeks in a row, but the dovishness of the Fed in the lates week has resulted in some FPI buying in EMs. Here is what drove FPI sentiments this week.

• The minutes of the RBI Monetary Policy Committee (MPC) were published during the week, but the focus continued to be on inflation. Not surprisingly, two out of the 6 members of the MPC continued to vote for 25 bps rate cut and a shift in the4 stance from “Gradual Withdrawal of Accommodation” to “Neutral”. However, the minutes of the MPC meeting make it apparent that there is still too much of caution over inflation and that is unlikely to change in the near future. The only trigger for a rate cut could come from the fact that there have been several downgrades of India’s GDP and the latest month showed pressure in terms of IIP growth, despite a sharply lower base. However, the RBI governor had the last word on the subject when he said that for the RBI it would inflation above all else. He also hinted that the RBI would continue to be driven by data flows rather than by outlook and expectations.
• The FOMC minutes were also published in the week by the Federal Reserve and once again, the inflation concerns continue to be high. Powell in his interactions has been hinting at a rate cut in the next policy in September, although many of the hawks in the FOMC like Raphael Bostic and Michelle Bowman continue to believe that it would be more appropriate to cut rates only around the end of 2024. It does look like there may be a token rate cut in September, but anything beyond that looks hazy.
• A much clearer indication of the Fed intent came when Jerome Powell addressed the Jackson Hole Symposium on August 23, 2024. Powell made it clear that the time was ripe for a rate cut, although he also made that conditional to the fact there were no shocks in the inflation data, labour data or the consumer spending data. For now, the decision to cut rates by the Fed in September appears to be triggered less by confidence on inflation and more by fears that the labour data of July may be indicative of a gradual slowdown in the US economy. We are not sure what is the correct interpretation, but clearly, the Fed is going ahead with its first rate hike in September 2024.
• The CME Fedwatch continued to point to aggressive rate cuts in 2024 and 2025. The FOMC minutes and the speech delivered by Powell at Jackson Hole only underscored the point the rate cut confidence. However, while the Fed has only hinted at one rate cut of 25 bps in 2024 the CME Fedwatch is pencilling in 3 to 4 rate cuts of 75 bps to 100 bps in 2024 itself and the CME Fedwatch probabilities also assign a high probability to rate additional 4 to 5 rate cuts in 2025 at the bare minimum. In fact, the CME is now pegging that by the end of 2025, the reop raters would be anywhere between 200 bps and 250 bps lower than the current levels of 5.25%-5.50%.
• There are two market internal data points that are likely to drive the quantum and quality of FPI flows in India. Firstly, a recent study has underlined that the share of PSUs in the overall market cap has gone up from 11% to 15% in the last 2 years. That is likely to induce FPIs to continue to be short on PSUs and buy into private sector stocks. Secondly, the NSE announced two major changes in the Nifty 50 index. While Bharat Electronics Ltd and Trent Ltd are to be included in the Nifty 50 index, Divi’s Laboratories and LTI Mindtree will be dropped from the index. One can expect realignment of holdings by passive funds, and that will impact flows in the coming week.
• Auto demand has been falling and that is not great news for the auto sector, which has shown rapid growth in value in the last one year on robust demand. According to data released by the Federation of Automobile Dealers Association (FADA), there is a surplus of 7.30 Lakh vehicles with the dealers and that is forcing them to offer heavy discounts. Most of the dealers are unwilling to add more stocks and companies like Maruti Suzuki and others are even tweaking their production schedules to reduce the flow of vehicles to the dealerships. This space needs to be closely watched.

The coming week could be more about the GDP data in India, core sector and fiscal deficit update; while the US cues will be about the GDP update for Q2 and PCE inflation.

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
29-Jul-24	4,269.26	4,269.26	509.90	509.90
30-Jul-24	-2,726.36	1,542.90	-325.59	184.31
31-Jul-24	-2,865.96	-1,323.06	-342.27	-157.96
01-Aug-24	-2,853.76	-4,176.82	-340.78	-498.74
02-Aug-24	1,826.35	-2,350.47	218.14	-280.60
05-Aug-24	-3,367.22	-5,717.69	-402.12	-682.72
06-Aug-24	-3,692.07	-9,409.76	-440.38	-1,123.10
07-Aug-24	-3,024.79	-12,434.55	-360.49	-1,483.59
08-Aug-24	-2,841.65	-15,276.20	-338.49	-1,822.08
09-Aug-24	521.65	-14,754.55	62.13	-1,759.95
12-Aug-24	-1,161.33	-15,915.88	-138.42	-1,898.37
13-Aug-24	-2,811.08	-18,726.96	-334.77	-2,233.14
14-Aug-24	-1,419.70	-20,146.66	-169.08	-2,402.22
15-Aug-24	0.00	-20,146.66	0.00	-2,402.22
16-Aug-24	-2,377.62	-22,524.28	-283.26	-2,685.48
19-Aug-24	1,196.49	-21,327.79	142.51	-2,542.97
20-Aug-24	-1,756.42	-23,084.21	-209.30	-2,752.27
21-Aug-24	4,034.96	-19,049.25	481.61	-2,270.66
22-Aug-24	-430.70	-19,479.95	-51.32	-2,321.98
23-Aug-24	1,852.13	-17,627.82	220.60	-2,101.38

Data Source: NSDL

FPIs turned net buyers after three weeks of being net sellers in a row. The 3 weeks prior to the current week saw net selling of ($2.70) Billion but the 7 weeks prior to that saw $9.04 Billion of net inflows from FPIs. Here are some key FPI data takeaways.

• In previous 7 rolling weeks, FPIs saw net outflows of $(926) Million, $(1,479) Million, $(281) Million, net inflows of $349 Million, $1,845 Million, $885 Million, and $953 Million. In the latest week to August 23, 2024 net FPI equity inflows were $584 Million.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from equities were to the tune ₹(17,628) Crore or $(2,101) Million. This number had been in the positive for over 8 weeks; before it has turned negative in the last 3 weeks.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

The last few weeks have been action packed. There was the Union Budget, Fed policy statement, MPC minutes, FOMC minutes, and the Jackson Hole speech of Powell. In the coming week, three factors are likely to impact the FPI flows in India.

• After Jackson Hole, the next big data next point will be Q1FY25 GDP update. FPIs will be keen to ensure India is able to sustain its world-beating growth momentum in Q1FY25.
• The second big focus area would be the core sector and the fiscal deficit update for India. FPIs will be keen to see infra push robust and fiscal deficit in check.
• Last, but not the least, the FPI focus will also be on the US Q2GDP update and PCE inflation update, to ensure that the rate cut in September is on target.

FPI flows are still in a state of flux. Hopefully, the last week of August should give more confidence to the FPIs on the India story.