Weekly Musings – FPI flows for week ended December 22, 2023

24 Dec 2023 , 10:11 AM

FPIs infuse record $1.75 billion in the week to December 22, 2023

The week to December 22, 2023 was another bumper week for FPI flows. FPIs infused $1.75 billion into Indian equities in the week, which comes on top of $1.95 billion, $2.01 billion, and $2.20 billion in the three weeks prior to that. Effectively, in the last 4 weeks, the FPIs have infused $7.91 billion into Indian equities, making it one of the most productive in recent memory. In fact, since the start of December 2023, FPIs have infused Rs57,313 crore into Indian equities. This is already the best month in the last 36 months since FPIs infused over Rs62,000 crore into Indian equities in December 2020. However, there is still one more week to go for December and if the data of the last 4 weeks is anything to go by, then the FPIs could just about get the better of the December 2020 figure also

If you look at December so far, FPIs have already infused $7.91 billion into Indian equities with one more week to go, so there is still a lot more action likely in the last week. 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 10.6% 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 nearly $2.5 billion. Clearly, the focus appears to be on the India story; and FPIs are lapping up equity and debt.

Big Story: After Fed dovishness; all eyes are on the RBI

The big question now is whether the RBI will also follow the Fed example and turn dovish instead of giving out mixed signals. That would mean; that the RBI would also change its monetary stance to Moderate and give guidance on cutting rates. In its December policy statement, the Federal Reserve has given guidance of cutting rates by minimum 175 basis points over the next two years. However, the RBI MPC minutes announced during the week did not carry any indications of shifting the moderate stance. Considering the unique challenges in India, the RBI appears to be wary of giving out any dovish signals that may be premature. For now, it looks like the RBI will bide its time, but the Fed move and the high real rates will surely put pressure on RBI to cut rates. That could magnify FPI flows in India.

What impacted FPI sentiments in the week to December 22, 2023?

The latest week was continuation of the trend of last 3 weeks. After infusing $2.2 billion,  $2.01 billion, and $1.95 billion in the last three weeks, the FPIs have infused another $1.75 billion in the latest week to December 22, 2023. In the last 4 weeks, the FPIs have infused $7.91 billion into Indian equities and another $2.5 billion into Indian debt paper. Here are the 5 factors that influenced FPI flows during the week.

1. The RBI policy minutes were supposed to give some indications that the RBI was also thinking on the lines of rate cuts, especially after the Fed had turned dovish. There was not much in the statement to indicate that the RBI was planning to change its stance. However, the minutes offered some important clues. Firstly, it was clear that the focus was all about the GDP growth being much better than expected. That means, the RBI would reverse rates, at least back to the pre-COVID levels. Secondly, several MPC members expressed concerns over the high levels of real interest rates; a clear signal that rates would eventually be headed down.

    

2. The third and final estimate of US GDP growth for the third quarter came in at 4.9%. The first advance estimate had pegged the GDP growth for Q3 at 4.9%, but it had been upgraded to 5.2% in the second estimate. However, the third estimate came back to 4.9%. What really mattered was that the positive third quarter had resulted in Fed upgrading the full year growth target from 1.1% to 2.6% over the last 6 months. That means; exports from India would be set to revive and, more importantly, the tech spending in the US would also be back in a big way. That is good for Indian IT; which explains why there has been a lot of FPI flows into Indian IT in recent weeks.

    

3. The other big data point towards the end of the week was the PCE inflation for November 2023. PCE inflation is the inflation that is measured from the perspective of personal consumption expenditure (PCE). It is the measure that the Fed uses to take a call on interest rates in the economy. PCE inflation for November came in sharply lower at 2.6%, which is just about 60 bps from the eventual target of 2.0%. In addition, there has been a sharp fall in inflation across the board; food, energy, and core inflation. This paves the way for the RBI to eventually adjust rates towards lower real rates and that is likely to be positive for FPI flows.

    

4. In what could have much bigger implications for crude oil prices, there are the first indications that Angola may walk out of the OPEC. Angola has been unhappy with the predominance of Saudi Arabia and Russia in the OPEC plus gathering. It wants to boost output when the market is ripe and the OPEC quotas are not allowing them to do so. If Angola walks out, other African members like Algeria, Libya, Nigeria, and Congo may also follow a similar path since most of them are unhappy with the quotas on oil production. It is estimated that an exit from OPEC and a spike in output could just about bring down crude oil prices sharply. That would be positive for India and has been one of the major reasons driving the FPI flows into India. More so, considering India’s sensitivity to the oil prices globally. India relies on imports to meet nearly 80% of its crude demand.

    

5. The combination of US bond yields and dollar index (DXY) helped FPI flows in the week; as in the last four weeks. The US bond yields dipped further and stayed close to 3.9% after having scaled 5% about 2 months back. The dollar index is now closer to 101 levels. These two factors had a positive impact on the Indian rupee which appreciated to 83.16/$. The combination of sharply lower US bond yields and sharply lower dollar index have led to a lot of risk-on flows into EMs and India continues to be a big beneficiary.

Are there any other factors that are influencing the FPI flows into India? There are more technical reasons like the FOMO factor (we spoke about that last time) and the aggressive short covering that is visible. In addition, the subdued VIX is ensuring that any dip is being met with aggressive buying. From a more fundamental standpoint, it is obvious that most FPIs are also betting on the India $5 trillion story. After all, that is a story that is hard to ignore for any serious investor.

Macro FPI flow picture up to December 22, 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 #	51,197.35	6,115.80	57,313.15	20,074.85	77,388.00
Total for 2023 (₹ cr)	1,20,584.40	41,700.98	1,62,285.38	67,626.46	2,29,911.84
Total for 2023 ($ bn)	14.639	5.044	19.683	8.162	27.845
# – Recent Data is up to December 22, 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 has now been more than offset by the FPI buying in the secondary markets in December 2023 to the tune of Rs51,197 crore. What also matters is that in December, the secondary markets are contributing nearly 90% of the flows with the IPOs just contributing the balance 10% of the FPI flows in the month. 

At the same time, the debt markets also saw net inflows of Rs20,074 crore in the first three weeks of December 2023. This is on top of Rs15,545 crore that was infused by FPIs into debt in November 2023. If you look at a longer range picture, then the net inflows in 2023 till date, to the tune of Rs2.30 trillion is a good 53.4% higher than the 2022 net outflows of Rs1.33 trillion. Also, if you look at the total FPI net inflows of $27.85 billion in 2023 so far, $14.64 billion came from secondary equity markets, $5.05 billion via equity IPO market and the balance $8.16 billion via FPI debt flows. 

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
27-Nov-23	0.00	0.00	0.00	0.00
28-Nov-23	2,522.82	2,522.82	302.62	302.62
29-Nov-23	1,786.47	4,309.29	214.23	516.85
30-Nov-23	4,313.30	8,622.59	517.69	1,034.54
01-Dec-23	9,744.03	18,366.62	1,169.05	2,203.59
04-Dec-23	5,717.47	24,084.09	685.88	2,889.47
05-Dec-23	5,501.97	29,586.06	660.22	3,549.69
06-Dec-23	5,795.20	35,381.26	694.92	4,244.61
07-Dec-23	200.28	35,581.54	24.03	4,268.64
08-Dec-23	-453.66	35,127.88	-54.42	4,214.22
11-Dec-23	3,993.95	39,121.83	479.08	4,693.30
12-Dec-23	871.91	39,993.74	104.56	4,797.86
13-Dec-23	2,588.08	42,581.82	310.40	5,108.26
14-Dec-23	5,300.35	47,882.17	635.57	5,743.83
15-Dec-23	3,473.78	51,355.95	416.77	6,160.60
18-Dec-23	10,237.19	61,593.14	1,230.73	7,391.33
19-Dec-23	1,786.51	63,379.65	215.19	7,606.52
20-Dec-23	1,859.92	65,239.57	223.61	7,830.13
21-Dec-23	2,007.33	67,246.90	241.40	8,071.53
22-Dec-23	-1,311.16	65,935.74	-157.45	7,914.08

Data Source: NSDL

The week to December 22, 2023 was the fourth week in a row of elevated FPI inflows. FPIs infused another $1.75 billion in the latest week to December 22, 2023. Here is a quick look at the FPI flows story on a weekly basis.

• In last 5 rolling weeks, FPIs saw inflows of $1.95 billion, inflows of $2.01 billion, inflows of $2.20 billion, inflows of $127 million, and inflows of $869 million. The latest week saw net FPI inflows of a healthy $1.75 billion, 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 Rs65,936 crore or $7,914 million. FPI flows were almost uniformly distributed in the last 4 weeks.

What will drive FPI flows in the coming weeks?

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

• New year allocations of FPIs will have a major bearing on the FPI flows. It is expected that Temasek may just be the tip of the iceberg and India could see a slew of big-ticket long-only funds increasing their India allocations in 2024.

   

• During the week, the markets fell sharply on Wednesday on the latest JN.1 variant of the COVID virus. The news flows are not too encouraging and there appears to be a slew of restrictions being imposed by select nations. We have to watch this space closely.

One quick takeaway from the FPI story for December is that; the undertone of FPIs may have decisively turned for the positive and it is here to stay. The only risk is that markets are at life-time highs, there is election volatility coming and the JN.1 variant is still the joker in the pack. It could be a tense next few weeks for markets.