Weekly Musings – FPI flows for week ended December 15, 2023

17 Dec 2023 , 01:06 PM

FPIs infuse record $1.95 billion in the week to December 15, 2023

The week to December 15, 2023 was another bumper week for FPI flows. FPIs infused $1.95 billion into Indian equities in the week, which comes on top of $2.01 billion in the previous week and $2.20 billion in the week before that. In short, the FPIs have infused close to $6 billion into Indian equities in the last 3 weeks and it is hardly surprising that the Nifty and the Sensex have closed the week at life-time highs. The turnaround in FPI flows that started in the last week of November has continued well into the first half of December 2023.

If you look at December so far, FPIs have already infused $5.13 billion into Indian equities in the first half of December, which means a lot more action is likely in the second half. The picture becomes more interesting if you look at the break-up of this infusion. Contrary to the trend in the last few weeks, just about 7% of equity flows came from IPOs with the substantial chunk of flows coming from secondary market. Even the debt market has seen robust inflows in December 2023 to the tune of more than $1.1 billion.

Big Story: Fed dovishness made all the difference to FPI flows

The Fed was expected to go easy on its hawkishness, but the extent of dovishness displayed by the Fed was beyond all expectations. The Fed raised its commitment to rate cuts from 2 cuts to 3 cuts in 2024. In addition, the Fed also promised another 4 rate cuts in 2025. That is a commitment that rates would be lower by 175 bps by the end of 2025. The CME Fedwatch expects the full 7 rate cuts to happen in 2024 itself, but that may be tad too optimistic.

For the week, the US inflation also gave out positive indications. For November 2023, the consumer inflation in the US was lower by 10 bps at 3.10%. One can argue that the inflation is still about 110 bps from the target of 2%, but the move is surely in that direction. Also, while the core inflation remained stagnant in the month, there was a sharp fall in food and fuel inflation in the month of December. Of course, the India Goldilocks moment of subdued inflation and higher than expected IIP growth also helped boost FPI flows this week.

What triggered FPI sentiments in the week to December 15, 2023?

The latest week was continuation of the trend of last two weeks. After infusing $2.2 billion and $2.01 billion in previous two weeks, FPIs infused $1.95 billion in the current week to December 2015. This marks the third consecutive week of robust FPI flows into Indian equities. Debt also saw inflows of $1.1 billion in December. What explains the third week in succession that the FPI flows stayed so robust. There were 6 factors at play.

1. The US Fed statement in the aftermath of the monetary policy statement made a big difference to the FPI sentiments. The Fed finally stopped talking about the extent of hawkishness and has now guided about more aggressive rate cuts in 2024 and 2025. The Fed suggesting 7 rate cuts in the next two years is a clear indication that rate hikes are done and dusted and they just remain an outside possibility. It also means that the Fed has managed to rein in inflation to a great extent, without risking a hard landing of the economy. That is the real good news that FPIs are celebrating. 

    

2. Along with the Fed statement, the Fed also released its quarterly update on the macro projections for the next few years and for the longer term. While the longer term projections are intact, there are some interesting shifts between September and December projections of the Fed. For instance, in September growth, the Fed had raised growth estimate from 1.1% to 2.1%. In December, that has been further raised to 2.6% for year 2024. Inflation estimate have also been cut sharply for the next two years. That gives FPIs a lot more comfort to allocate monies to EMs like India.

    

3. The fall in US inflation was the third factor that spurred FPI investments into India. The last few weeks have been very positive for the FPI flows. First, there was the India GDP number, then there was the RBI monetary policy and now there is the US policy statement and all have been conducive for sharper FPI flows. That explains the $6 billion that has come into India in the last 3 weeks from FPIs. US consumer inflation was lower at 3.1%, which indicates that the PCE inflation could actually fall below the 3% mark.

    

4. FPI flows are not just about global factors, but also about domestic factors. This week, we saw the combination of inflation and IIP growth again turn positive for the Indian markets. For instance, inflation at 5.55% for November was higher than October. However, it was lower than street estimates and it also means that once the food inflation spike is handled, inflation should be lower once again. But, the real boost came from the IIP number, which grew 12.07% for October 2023. While mining and manufacturing grew at over 10%, electricity grew at over 20%. Clearly, it is creating the Goldilocks moment for India with lower than expected inflation and robust IIP growth.

    

5. The combination of US bond yields and dollar index (DXY) helped FPI flows in the week. The US bond yields dipped below 4% after having scaled 5% about 2 months back. The dollar index is now closer to 102 levels. These two factors had a positive impact on the Indian rupee which appreciated to 83/$. Apart from these data points, the sharp fall in November India trade deficit to $20.5 billion also helped strengthen the INR. Normally, FPIs look at a steady rupee as a positive as it protects dollar returns much better.

    

6. Finally, there is the FOMO effect. The fear of missing out (FOMO) has been a major psychological factor in the Indian market. FPIs are realizing that the domestic institutions like LIC and mutual funds manage close to $1.2 trillion of funds. If you add the small savings, insurance companies, retail investors and HNIs, it is a humongous amount of liquidity that is floating in India, even in the absence of the FPIs. The FPIs have suddenly realized that in the midst of the Nifty rally from 19,000 to 21,000; it was the speed that confounded them. They surely do not want to miss out on the bigger story.

Till the third week of November 2023, FPI flows were tentative, but last 3 weeks changed the entire narrative. FPIs infused $6 billion in last 3 weeks and these are the best FPI flows in a long time. With the Indian market cap at $4.2 trillion and GDP poised to grow from $3.5 trillion to $5.0 trillion; India is surely not a story that FPIs want to watch from the sidelines. 

Macro FPI flow picture up to December 15, 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	9,232.57	3,029.71	12,262.28	6,075.54	18,337.82
Sep-2023	(14,576.40)	(191.10)	(14,767.50)	957.11	(13,810.39)
Oct-2023	(28,299.00)	3,751.34	(24,547.66)	6,672.20	(17,875.46)
Nov-2023	(368.40)	9,369.18	9,000.78	15,545.63	24,546.41
Dec-2023 #	39,739.87	2,993.49	42,733.36	9,053.16	51,786.52
Total for 2023	1,09,126.92	38,578.67	1,47,705.59	56,604.77	2,04,310.36
# – Recent Data is up to December 15, 2023

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

In the last 3 months i.e., September, October, and November 2023, the FPIs were net sellers in secondary market equities. FPIs sold Rs43,244 crore in secondary market equities in these 3 months. This was partially recouped by FPIs buying in the primary IPO markets and the debt markets. December 2023, however, looks like a different ball game. The equity markets have seen inflows of Rs42,733 crore with the secondary markets contributing 93% of the flows and the primary markets contributing just about 7% of the flows. 

At the same time, the debt markets also saw net inflows of Rs9,053 crore in the first half of December 2023. If you look at a longer range picture, then the net inflows in 2023 till date, to the tune of Rs2.04 trillion is a good 53.4% higher than the 2022 net outflows of Rs1.33 trillion. That is the big story of FPI flows in the first half of December 2023.

Daily FPI equity flows for last 4 rolling weeks

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

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
20-Nov-23	-372.74	-372.74	-44.77	-44.77
21-Nov-23	-598.73	-971.47	-71.85	-116.62
22-Nov-23	-152.50	-1,123.97	-18.29	-134.91
23-Nov-23	-1,364.76	-2,488.73	-163.76	-298.67
24-Nov-23	1,433.66	-1,055.07	171.99	-126.68
27-Nov-23	0.00	-1,055.07	0.00	-126.68
28-Nov-23	2,522.82	1,467.75	302.62	175.94
29-Nov-23	1,786.47	3,254.22	214.23	390.17
30-Nov-23	4,313.30	7,567.52	517.69	907.86
01-Dec-23	9,744.03	17,311.55	1,169.05	2,076.91
04-Dec-23	5,717.47	23,029.02	685.88	2,762.79
05-Dec-23	5,501.97	28,530.99	660.22	3,423.01
06-Dec-23	5,795.20	34,326.19	694.92	4,117.93
07-Dec-23	200.28	34,526.47	24.03	4,141.96
08-Dec-23	-453.66	34,072.81	-54.42	4,087.54
11-Dec-23	3,993.95	38,066.76	479.08	4,566.62
12-Dec-23	871.91	38,938.67	104.56	4,671.18
13-Dec-23	2,588.08	41,526.75	310.40	4,981.58
14-Dec-23	5,300.35	46,827.10	635.57	5,617.15
15-Dec-23	3,473.78	50,300.88	416.77	6,033.92

Data Source: NSDL

The week to December 15, 2023 was the third week in a row when inflows were around $2 billion. After FPIs infused $2.2 and $2.01 billion in the last two weeks, the latest week saw net inflows of $1.95 billion. More important is the fact that secondary market flows have dominated in December 2023. Here is a quick look at the FPI flows story on a weekly basis.

• In last 5 rolling weeks, FPIs saw inflows of $2.01 billion, inflows of $2.20 billion, inflows of $127 million, inflows of $869 million; and outflows of $(697) million. The latest week saw net FPI inflows of a healthy $1,946 million, reinforcing the trend of last 2 weeks.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI inflows into Indian equities were to the tune of Rs50,301 crore or $6,034 million. However, 82% of the flows of the last 4 weeks came in last two weeks to December 15, 2023.

What will drive FPI flows in the coming weeks?

There will be 2 key drivers of FPI flows in the next week.

• With the US policy statement done and dusted, the markets will actually wait for the Fed to convert their guidance into action in the form of rate cuts. That may take some to manifest. For now, the focus would be on the US bond yields and the dollar index (DXY), which will be the short term driver of FPI flows into India.

   

• Several PE funds have been taking big exits in India in the last 3 weeks. That is something the FPIs have been watching very closely. PE funds are not too worried about the level of markets, but they are still a key influencing factor in FPI flows.

It looks like the undertone of FPI view on India has now decisively turned for the positive and that is how it is likely to stay. The next few weeks will confirm if the shift is for real, but the broad indications are certainly positive. With markets at life-time highs, the big question would be whether the FPIs really believe that India is in a structural bull market.