Weekly Musings – FPI flows for week ended February 09, 2024

11 Feb 2024 , 09:07 AM

FPIS BACK TO BEING NET SELLERS IN EQUITIES

The previous week had seen a small turnaround with FPIs showing up as buyers in equities, albeit marginal. However, in the current week, the FPIs were back to their selling ways. For the week to February 09, 2024 FPIs again turned net sellers to the tune of $618 Million. That may not be big, but the selling was rather intense in the last two days amidst very high volumes. Remember, the FPIs were net buyers in the previous week to the tune of a modest $126 Million. However, in the 3 weeks prior to that, FPIs had been net sellers to the tune of $1,706 Million, $2,033 Million, and $110 Million respectively. In a sense, the latest week FPI selling of $618 Million saw the foreign investors return to their selling ways. Effectively,  the FPIs had bought $10 Billion in the seven weeks between the end of November 2023 and the middle of January 2024. Since then, the FPIs are back to being net sellers in Indian equities.

However, the bigger story in the last few weeks was not on the equity front but on the debt front, where the FPIs have been frenetic buyers. Even since the announcement was made about the inclusion of Indian bonds into the JP Morgan and Bloomberg benchmark bond indices, there has been elevated levels of interest in Indian debt. It started with the Russian oil vostro surpluses finding their way into G-Secs and now we see the preparatory flows ahead of the index inclusion. It is estimated that the index inclusion will bring passive debt investments of close to $35 Billion into India, and the groundwork for that has already started. The Union Budget restrained fiscal deficit and that was positive for Indian debt paper. It was, therefore, not surprising that FPIs have been net buyers in debt to the tune of ₹34,815 Crore in debt, or $4.19 Billion; in the first 40 days of calendar 2024.

BIG STORY: MONETARY POLICY REAFFIRMS BUDGET THRUST

The first big boost to Indian debt markets came from the Interim Budget presented by the finance minister on February 01, 2024. The big story was about the fiscal prudence statement made by the interim budget. For FY24, the budget reduced the full year fiscal deficit estimate from 5.9% to 5.8% of GDP. That surely sounded bold amidst falling nominal growth in GDP, but there was more to come as the interim budget also reduced the fiscal deficit estimate to 5.1% of GDP for FY25. That is 20 bps to 40 bps lower than the street estimates. Lower fiscal deficit means lower borrowing needs and reduces the probability that the government would crowd out private sector borrowing. That will also keep the interest rates under check with bond yields trending lower. Also, the capex growth for FY25 may have been cut to 11.1% from 30%; but the lag effect would be good enough. Also, capex at 3.4% of GDP continues to be impressive. FPIs would still await the full budget in July, but the message appears to be of fiscal prudence; and no compromise on capex.

If the budget gave a strong message to the debt markets about the government’s commitment to fiscal prudence, the monetary policy was also largely supportive. The RBI Monetary Policy Committee (MPC) held repo rates at 6.5%, but gave enough indications that inflation and inflation expectations were largely reined in. The monetary policy also underlined that the structural core inflation was coming down faster than expected and that had left the Indian economy resilient to external shocks. As we stand, the situation in the Red Sea continues to get murkier. That remains the X-factor for inflation, but the monetary policy underlines that oil is a risk that India can quite effectively manage. Liquidity deficit looks set to continue, which means rates at the short end may still be elevated.

MACRO FPI FLOW PICTURE UP TO FEBRUARY 09, 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)	(3,529.31)	454.53	(3,074.78)	15,664.75	12,589.97
Total for 2024 (₹ Crore)	(32,393.20)	3,574.87	(28,818.33)	34,814.96	5,996.63
For 2024 ($ Million)	(3,897.64)	430.38	(3,467.26)	4,192.79	725.53
# – Recent Data is up to February 09, 2024

Data Source: NSDL (Negative figures in brackets)

As of February 09, 2024, the FPIs turned net buyers for 2024 to the tune of $725.53 Million. However, that appears palatable because the debt inflows have largely offset equity outflows. For 2024 so far, FPIs net sold equities worth $3,467.26 Million but were net buyers in debt to the tune of $4,192.79 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. For now, the interim budget and RBI policy have surely mollified the FPIs.

FPI SENTIMENTS – THE WEEK THAT WAS

After seeing a brief interlude of FPI buying to the tune of $126 Million in the previous week, the latest week to February 09, 2024 saw FPI outflows to the tune of $618 Million from equities. However, debt flows continued to be positive leaving FPIs net buyers overall in February and for year 2024 till date. Here are the 5 key data points that influenced FPI action in the week to February 09, 2024.

1. The impact of the interim budget continued to prevail on the market although it was announced in the previous week. The Interim budget had a lot of giveaways for the FPIs; indirectly if not directly. The sharply lower fiscal deficit and the signal towards sustained capex was a positive signal for equities and debt. However, FPIs took the debt signal more seriously as that is in tune with the bets that interest rates in most of the global economies, including India should be headed lower. Also, despite the concerns surrounding the election bets, the FPs were broadly positive about Indian markets. 

    

2. The big news in the week was the monetary policy announcement. For now, the RBI has maintained status quo on rates and on the monetary stance. The good news is that the RBI is not exactly talking hawkish, nor does it have any pretensions that rates could be raised in the near future. Unlike other central banks, the RBI has shown that it would also be sensitive to growth. FPIs had appreciated when the RBI took a bold move to stop rate hikes in February 2023. In retrospect, the move appears to have paid off. It also looks the right decision in retrospect as it has avoided any solvency damage to Indian companies. 

    

3. The other positive takeaway from the monetary policy was on the growth estimates. For now, the RBI has stuck to its stance of 7% growth in FY24 with 5.4% inflation. That was along expected lines. However, the MOSPI estimate for FY24 growth stands at 7.3%. The first indication will come when the Q3 GDP is announced on the last day of February, but the RBI mentioning this dichotomy in this policy statement is a signal that actual GDP growth could be higher than its 7% estimate. Secondly, for FY25, the GDP estimate has been held at 7% and inflation at 4.5% (despite oil fears). This 250 bps gap is likely to be seen as a positive statement about the future trajectory of the Indian economy.

    

4. The week closed with oil prices well above $82/bbl in the brent crude market. There were several oil related concerns emanating from the situation in the Red Sea. Firstly, we saw Houthi rebels firing at Indian vessels during the week, something that was unheard of till date. That is likely to make Indian cargo more cautious about the Red Sea route. Secondly, the proposed ceasefire between Israel and Gaza broke off as Hamas made unreasonable demands. That means; Israel will intensify its strikes on the densely populated Rafah region, raising the possibility of more casualties and more repercussions from the Hamas and Houthi rebels. It clearly looks like the oil situation in the Red is moving towards boiling point; with its concomitant inflation risks.

    

5. As we close the week, it looks like debt moderation is back on the agenda of Indian companies. Ultratech, India’s largest cement company and a crown jewel of the Aditya Birla group, has decided to move towards zero net debt status in the next one year. Its net debt (net of cash on hand) stands at ₹5,541 Crore. Back in 2020, the move towards zero net debt was triggered by Reliance Industries and many other Indian companies joined the fray. That had made balance sheets stronger, but in the last 2 years, growth and capex has been the name of the game. As capex cycles start to peak, it is significant that companies are back to looking at cutting debt to add value. It may be small, but could be a significant news flow for the FPIs from a medium term perspective.

The Interim Budget and the monetary policy have painted a positive picture for the FPIs. It remains to be seen if the FPI enthusiasm for debt extends to equities too. 

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 (₹ Crore)	Cumulative flows	FPI Flow($ Million)	Cumulative flow
15-Jan-24	-430.73	-430.73	-51.90	-51.90
16-Jan-24	2,015.34	1,584.61	243.24	191.34
17-Jan-24	1,181.73	2,766.34	142.41	333.75
18-Jan-24	-10,482.64	-7,716.30	-1,260.97	-927.22
19-Jan-24	-9,194.65	-16,910.95	-1,106.13	-2,033.35
22-Jan-24	0.00	-16,910.95	0.00	-2,033.35
23-Jan-24	-3,553.90	-20,464.85	-427.49	-2,460.84
24-Jan-24	-2,707.20	-23,172.05	-325.77	-2,786.61
25-Jan-24	-5,426.40	-28,598.45	-952.64	-3,739.25
26-Jan-24	0.00	-28,598.45	0.00	-3,739.25
29-Jan-24	5,069.88	-23,528.57	609.98	-3,129.27
30-Jan-24	-4,264.40	-27,792.97	-512.86	-3,642.13
31-Jan-24	-1,814.65	-29,607.62	-218.32	-3,860.45
01-Feb-24	1,740.15	-27,867.47	209.45	-3,651.00
02-Feb-24	312.64	-27,554.83	37.69	-3,613.31
05-Feb-24	228.48	-27,326.35	27.58	-3,585.73
06-Feb-24	762.88	-26,563.47	91.88	-3,493.85
07-Feb-24	-472.77	-27,036.24	-56.91	-3,550.76
08-Feb-24	-1,601.32	-28,637.56	-192.99	-3,743.75
08-Feb-24	-4,044.84	-32,682.40	-487.47	-4,231.22

Data Source: NSDL

The week to February 09, 2024 saw FPI outflows of $618 Million, after a brief interlude of buying the week before that. Here is a quick run-down.

• In last previous 5 rolling weeks, FPIs had seen net inflows of $126 Million, net outflows of $1,706 Million, net outflows of $2,033 Million, net outflows of $110 Million, and net inflows of $574 Million. The latest week saw to February 09, 2024 saw net FPI outflows from equities to the tune of $618 Million, which was more a cautious statement on the worsening Red Sea crisis. Rising oil prices did not help the cause, either.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from Indian equities were ₹(32,682) Crore or $(4,231) Million. The rolling 4-week flow had turned negative about 4 weeks back; and has stayed negative since then.

One clear trend emerging from the FPI flow story is the perceptible shift from equity towards debt.

WHAT WILL DRIVE FPI FLOWS IN COMING WEEKS?

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

• In the coming week, the US inflation reading for January 2024 will be announced, and it is expected to see normalization. That is likely to be positive for FPI flows.

   

• The big news in the coming week will be the India CPI inflation data and the IIP data; with IIP likely to be impacted by the higher base effect.

   

• With the worsening Red Sea crisis, FPIs will be closely looking at the India trade data for January for signals of pressure on the current account deficit.

One quick takeaway from the FPI story for the week to February 09, 2024 is that; FPIs are more confident of debt than of equities. That situation could continue till the general elections in May 2024.