Weekly Musings – FPI flows for week ended February 02, 2024

5 Feb 2024 , 06:44 AM

FPIS TURN BUYERS IN EQUITIES, BUT STILL REMAIN CAUTIOUS

The week to February 02, 2024 was a small turnaround of sorts. After 3 weeks of successive FPI outflows; the FPIs turned net buyers to the tune of $126 million. That may not be big, but the budget appears to have worked positive for sentiments. Hence, after being net sellers to the tune of $1,706 million, $2,033 million, and $110 million in the last 3 weeks, FPIs turned net buyers in the latest week to February 02, 2024. The latest week inflows still look like small change compared to inflows of $10 billion in the seven weeks between the end of November 2023 and the middle of January 2024. But, the bigger story of FPI flows is not so much in equity, as it is in debt. Here is why!

Even since the announcement was made about the inclusion of Indian bonds into the JP Morgan and Bloomberg benchmark bond indices, there had been a lot of interest in Indian debt. First it was the Russian oil vostro surpluses that flowed into G-Secs and now it is the preparatory flows ahead of the index inclusion. Also, real yields in India continue to be quite attractive as bond yields have been robust, even amidst flat to lower inflation. With the US Fed almost having called off rate hikes, the comparative equations also appear to be working in India’s favour in terms of debt flows. Not surprisingly, India saw net inflows of $2.91 billion into debt in 2024 so far, which wiped out equity outflows. But, more later!

BIG STORY: INTERIM BUDGET MAKES THE RIGHT NOISES

There were two key announcements in the Interim Budget presented on February 01, 2024 that appealed to the FPIs. The first announcement pertained to the fiscal management. For FY24, the budget reduced the fiscal deficit estimate from 5.9% to 5.8% of GDP. If that sounded bold, then the budget also sharply reduced the fiscal deficit estimate to 5.1% of GDP. That is anywhere between 20 bps to 40 bps lower than the street estimates. In addition, the capex allocation growth for FY25 has been reduced to 11.1% from 30% in the last 2 years. However, the absolute allocation of Rs11.1 trillion is still worth its weight in gold. While FPIs will still await the full budget in July 2024 after the elections, the interim budget has set the tone for what the government is; or, at least, what it should be?

One can argue that fiscal prudence and capex are more relevant to FDI flows than to FPI flows; and that is largely correct. However, fiscal prudence does impact FPI flows in two ways. Firstly, it induces a more positive approach towards India’s sovereign rating by the global rating agencies. Secondly, fiscal prudence has been known to keep the rupee steady and the bond yields flat to lower. These are positive for the FPI flows. Having said that, there are still concerns for FPIs in terms of current headwinds. The Red Sea crisis is far from over and the results of Q3FY24 have shown a lot of pressure. Indian exports are under pressure and that is likely to rub off on the current account deficit for Q3. Despite the positive cues from the Union Budget, the FPIs are likely to remain tentative till elections are over.

MACRO FPI FLOW PICTURE UP TO FEBRUARY 02, 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 (₹ cr)	(146,048.38)	24,608.94	(121,439.44)	(11,375.78)	(132,815.22)
Calendar 2023 (₹ cr)	1,27,759.75	43,347.14	1,71,106.89	65,954.38	2,37,061.27
Jan-2024	(28,863.89)	3,120.34	(25,743.55)	19,150.21	(6,593.34)
Feb-2024 #	2,021.63	31.16	2,052.79	5,046.60	7,099.39
Total for 2024 (₹ cr)	(26,842.26)	3,151.50	(23,690.76)	24,196.81	506.05
For 2024 ($ million)	(3,228.68)	379.33	(2,849.35)	2,913.12	63.77
# – Recent Data is up to February 02, 2024

Data Source: NSDL (Negative figures in brackets)

As of February 02, 2024, the FPIs turned net buyers for 2024 to the tune of $63.77 million. However, that appears palatable because the debt inflows have largely offset equity outflows. For 2024 so far, FPIs net sold equities worth $2,849.35 million but were net buyers in debt to the tune of $2,913.12 million. Of course, these are early days for 2024 and we will need more data points to be able to assess whether 2024 continues the strong inflow story of year 2023. For now, the budget and macros appeared to have stabilized FPI flows.

FPI SENTIMENTS – THE WEEK THAT WAS

The week saw FPI turning net buyers in equities after 3 consecutive weeks of selling. Of course, the net equity inflows of $126 million by FPIs in the latest week was paltry compared to the selling of nearly $4 billion in the last 3 weeks. However, it does look like a positive shift in sentiments. Here are the 5 key data points that influenced FPI action in the week to February 02, 2024.

1. The interim budget was supposed to be a non-event due to being announced just a few months ahead of the upcoming general elections. However, the government did make the best of the opportunity by giving out a message of fiscal prudence. The government cut central fiscal deficit estimate from 5.9% to 5.8% for FY24. Better still; they also cut the fiscal deficit estimate for FY25 to 5.1%, against the street expectation in the range of 5.3% to 5.5%. Fiscal prudence has always impressed the global investors and aggressive fiscal prudence has even surprised the global investors positively. 

    

2. Talking on the Interim Budget announcement, the other big talking point was the capex allocation. In the last financial years (FY23 and FY24), the government had shown monthly growth in capex at over 30%. However, for FY25, the growth in capex has been cut to 11% at Rs11.1 trillion. In absolute terms, it is still higher, but growth is lower. However, in a tough election year, the markets are still going to find this number impressive. After all, when it comes to capex, it is not just the annual allocation, but also the cumulative lag effect that matters. After all, capex has a multiplier effect on growth for several years; and that cannot be ignored.

    

3. Amidst the uncertainty in the global markets, the Fed also announce its first monetary policy for 2024. To an extent, it was disappointing for the markets. There were strong expectations that the Fed would offer a trajectory of future interest rate cuts. However, the Fed chair Jerome Powell, instead, affirmed that rates were not likely to be cut in March 2024 also. That means; the markets would have to wait till May or June policy announcements for any rate cut announcements. The Fed continues to be paranoid about inflation, and rightly so. The Fed erred starting its inflation late in 2022 and they don’t want to repeat that mistake again. That was largely neutral for FPI flows.

    

4. The Red Sea crisis partially abated during the week, although the situation itself continues to be grim. According to reports, the Hamasa and Israel were moving close to a ceasefire, which would automatically lead to cessation of hostilities in the Red Sea region. That had a sobering impact on oil prices as Brent crude fell sharply from $82/bbl at the start of the week down to $77/bbl towards the end of the week. The oil prices also fell due to another reason. The US Fed gave a clear indication that rate cuts were ruled out for now. Higher rate means pressure on growth and consumption, so the assumption of higher oil demand also stood open to debate.

    

5. Finally, digital stocks and digital sentiments are under a cloud once again. Last week saw the stock of Paytm hitting the lower circuit fort two days in a row. The stock has already lost over 51% from its recent peak. The other digital story that is gradually evolving (or rather imploding) is Byju’s. The company recently raised funds on a rights basis at 99% discount to the last valuation. When a company loses 99% of its value; it only means one thing, that there is just no value left in the business. The future course of Byju’s and Paytm (two giants of the Indian digital ecosystem) are likely to have a profound impact on the digital India story. It does look like there are chinks in India’s digital armour.

With the Union Budget positive at a macro level, the FPIs may wait for a clearer picture on the monetary front when the RBI announces its monetary policy this week. The consensus is a rate status quo, but RBI has been known to spring surprises. For the FPIs, the uncertainty is not just about the monetary policy, but also about the upcoming general elections. After all, politics has been a volatile subject in India; as past elections have eloquently demonstrated. FPIs are likely to keep their fingers crossed till then.

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($ million)	Cumulative flow
08-Jan-24	1,769.05	1,769.05	212.69	212.69
09-Jan-24	285.00	2,054.05	34.31	247.00
10-Jan-24	-537.06	1,516.99	-64.61	182.39
11-Jan-24	-1,650.78	-133.79	-198.52	-16.13
12-Jan-24	-775.46	-909.25	-93.50	-109.63
15-Jan-24	-430.73	-1,339.98	-51.90	-161.53
16-Jan-24	2,015.34	675.36	243.24	81.71
17-Jan-24	1,181.73	1,857.09	142.41	224.12
18-Jan-24	-10,482.64	-8,625.55	-1,260.97	-1,036.85
19-Jan-24	-9,194.65	-17,820.20	-1,106.13	-2,142.98
22-Jan-24	0.00	-17,820.20	0.00	-2,142.98
23-Jan-24	-3,553.90	-21,374.10	-427.49	-2,570.47
24-Jan-24	-2,707.20	-24,081.30	-325.77	-2,896.24
25-Jan-24	-5,426.40	-29,507.70	-952.64	-3,848.88
26-Jan-24	0.00	-29,507.70	0.00	-3,848.88
29-Jan-24	5,069.88	-24,437.82	609.98	-3,238.90
30-Jan-24	-4,264.40	-28,702.22	-512.86	-3,751.76
31-Jan-24	-1,814.65	-30,516.87	-218.32	-3,970.08
01-Feb-24	1,740.15	-28,776.72	209.45	-3,760.63
02-Feb-24	312.64	-28,464.08	37.69	-3,722.94

Data Source: NSDL

The week to February 02, 2024 saw positive FPI inflows of $126 million, a turnaround from 3 successive weeks of FPI outflows. Here is a quick run-down.

• In last previous 5 rolling weeks, FPIs saw net outflows of $1,706 million, net outflows of $2,033 million, net outflows of $110 million, net inflows of $574 million, and net inflows of $1.06 billion. The latest week saw net FPI inflows of $126 million, which was largely triggered by a rally in the markets driven by a favourable budget statement on fiscal deficit. Of course, lower oil prices also helped the FPI flows during the week.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from Indian equities were Rs(28,464) crore or $(3,723) million. The rolling 4-week flow had turned negative about 2 weeks back; after a gap of more than 10 weeks.

There are no clear FPI trends that are emerging, but it does look like the interim budget and the Fed ambivalence on rates has impelled FPIs to look at India more positively.

WHAT WILL DRIVE FPI FLOWS IN COMING WEEKS?

There will be 3 key drivers of FPI flows in the coming weeks.

• The big event will be the RBI policy in the coming week and, while status quo is the consensus expectation, the markets will focus on monetary stance and liquidity.

   

• The Red Sea crisis will continue to get attention; especially a likely truce between Israel and the Hamas. After all, it is likely to have a deep impact on the global crude oil prices.

   

• FPI flows will also predicate on the IPO flows this week with 4 IPOs poised to collected nearly Rs2,700 crore between them. That is likely to give some assured FPI inflows.

One quick takeaway from the FPI story for the week to February 02, 2024 is that; FPIs are still on a “wait and watch” mode. Interim budget has made the right noises, but clearly the uncertainty over the upcoming general elections is quite overpowering.