Weekly Musings – FPI flows for week ended February 16, 2024

18 Feb 2024 , 06:28 PM

FPIS NET SELLERS IN EQUITIES, BUT MORE SUBDUED

In a way, the FPI s continued to be net sellers for the week to February 16, 2024. But the week was a rather curious case. Out of the five days of trading, the FPIs were net buyers in 4 days and net sellers on only one day. It was on the day after the US inflation data was announced about 20 bps higher than expectations that the US markets saw a sell-off and the Indian markets saw heavy selling by FPIs. However, that one day of selling was sufficient to turn FPIs net sellers for the full week. For the latest week, FPIs were net sellers only to the tune of $84 Million. In the weeks prior to the current week; FPIs were net sellers to the tune of $618 Million, net buyers for $126 Million, net sellers of $1,706 Million, net sellers of $2,033 Million. While the FPI buying intensity of November and December may be missing, the FPIs are not really selling too aggressively in recent weeks.

However, the real action in the first few weeks of calendar 2024 has been in debt markets and not in equities. FPIs may be still tentative when it comes to equities, but they are decisive buyers when it comes to debt. In fact, even since the announcement was made about the inclusion of Indian bonds into the JP Morgan and Bloomberg benchmark bond indices, there has been sustained interest from the FPIs in Indian debt. Earlier, it was the Russian vostro account funds that found its way into Indian debt markets, but now it is the FPIs who are actually lapping up debt paper in India, in preparation of the passive funds making a bond foray into India. It is estimated that index inclusion will bring passive debt flows of over $30 Billion into India, and the concomitant flows may be still higher. The Interim Budget restraining fiscal deficit was also positive for Indian debt paper. It was, therefore, hardly surprising that FPIs turned  net buyers in debt to the tune of ₹42,534 Crore in debt, or $5.12 Billion; in the first 45 days of calendar 2024.

BIG STORY: RECENT DATA CONFIRMS GOLDILOCKS EFFECT

The recent data on domestic inflation and IIP almost confirms the Goldilocks effect in India. What exactly is this Goldilocks effect? It is a very favourable macroeconomic situation in which the inflation is trending lower than expected and the growth is trending higher than expected. We got the inflation and IIP updates in the previous week. Inflation was 60 bps lower in January while the index of industrial production (IIP) bounced more than 100 bps in the month of December 2023 (IIP is normally reported with a lag of one month). 

While the Q3 GDP data will only be available on the last day of February, the IIP is a good approximation of GDP growth due to its magnifying effect on the GDP numbers. GDP is at over 6% cumulative for FY24 and that is a sign that the GDP numbers should be robust. The RBI, in its February 2024 policy announcement, has also underlined that GDP growth in FY25 would also stay above 7%; making it 3 years in a row above 7%. That is the Goldilocks effect that is making Indian markets attractive to FPIs from a longer term perspective.

MACRO FPI FLOW PICTURE UP TO FEBRUARY 16, 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)	(6,112.33)	2,336.64	(3,775.69)	22,383.72	19,608.03
Total for 2024 (₹ Crore)	(34,976.22)	5,456.98	(29,519.24)	42,533.93	13,014.69
For 2024 ($ Million)	(4,208.47)	657.08	(3,551.39)	5,122.01	1,570.62
# – Recent Data is up to February 16, 2024

Data Source: NSDL (Negative figures in brackets)

As of February 16, 2024, the FPIs turned net buyers for 2024 to the tune of $1,570.62 Million. However, that is more because the debt inflows have more than offset equity outflows. For 2024 so far, FPIs net sold equities worth $3,551.39 Million but were net buyers in debt to the tune of $5,122.01 Million. Of course, these are early days for 2024 and we will need more data points. But the moral of the story is two-fold. Firstly, FPIs shifting between equity and debt is a good sign as it shows that FPIs continued to be interested in the India story and asset reallocations are more of a routine nature.  Secondly, the domestic heft of mutual funds, LIC and the retail investors is so decisive today; that FPIs flows have become one of the factors; rather than being the only factor that drives the markets.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to February 16, 2024, FPI outflows were more subdued to the tune of $84 Million. However, debt flows continued to be positive leaving FPIs net buyers overall in February and for calendar 2024. Here are the 5 key data points that influenced FPI action in the week to February 16, 2024.

1. India inflation for January 2024 came in lower than expected. From 5.69% in December 2023, the CPI inflation fell to 5.10% in January 2024. The lower inflation was triggered by a sharp fall in food inflation, coupled with a fall in core inflation. Fuel inflation remains a problem point, but that is understandable considering the global pressures on oil prices. The lower inflation opens the doors for the RBI to cut rates more aggressively, although it looks unlikely the RBI would attempt any rate cuts before the new government is in place and the full budget has been presented in July 2024. It was not just the consumer inflation but even the WPI inflation showed a similar trend for January 2024; falling from 0.73% to 0.27%; and this is normally a lead indicator for consumer inflation.

    

2. The index of industrial production for December 2023 was sharply higher at 3.6%, although this can be attributed to the lower base effect in the year ago period. However,  it is the composition of the IIP change that is more important. For the month of December 2023, the IIP of mining and electricity is actually lower on a MOM basis. However, that is more than compensated by the spike in manufacturing IIP, largely on the back of better capacity utilization. That is the more attractive side of the IIP growth story and that it bodes well for GDP number to be announced towards the month-end.

    

3. The other big data point in the week was the US inflation number. In fact, that was one of the factors that was a disappointment. Of course, the US consumer inflation for January 2024 was lower at 3.1%, compared to 3.3% in December 2023. However, this was higher than the street estimates of 2.9%. That was because, food inflation tapered by just 10 bps and core inflation actually remained static. As soon as the US consumer inflation was announced, the US markets sold off and the next day saw heavy FPI selling in Indian equities too. In fact, that was the only day in the week when FPIs were net sellers. Higher than expected consumer inflation in the US also opens up the possibility that the PCE inflation, the Fed guide for rate setting, may also trend higher for January.

    

4. The other big positive piece of news flow in the week was the trade data. For January 2024, the merchandise trade deficit came in sharply lower at $17.49 Billion. However, what really flattered the street was the services trade surplus of $16.75 Billion for the month of January 2024. That means, the overall deficit was just $0.74 Billion for the month and that is a very positive indicator for the level of current account deficit (CAD) for Q3FY24 and for the full year. Based on the updated estimates, it looks like the full year current account deficit (CAD) for FY24 will be pegged comfortably at under 1.3% of GDP. That would be positive for the INR and for the sovereign rating reading of India.

    

5. Finally, we come to oil prices, which edged higher to $83.5/bbl in the Brent Crude market at the close of the week to February 16, 2024. After the ceasefire talks failed, there has been little let-up either from Israel or from the Hamas and Houthi rebels. Increasingly, ships are now taking the Horn of Africa route, with implications for delivery time schedules, freight costs and insurance costs. The only concern now is that if Israel gets into Rafah in a big way, it could lead to the crisis spreading across the Arab region. That could impact India’s oil economics quite a bit.

If the interim budget set the tone for FPIs to come back, the monetary policy and the inflation and IIP readings have also been positive. Of course, FPIs remain cautious on India amidst political uncertainty, but that has always been more of a technical issue and less of a fundamental concern for FPIs.

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
22-Jan-24	0.00	0.00	0.00	0.00
23-Jan-24	-3,553.90	-3,553.90	-427.49	-427.49
24-Jan-24	-2,707.20	-6,261.10	-325.77	-753.26
25-Jan-24	-5,426.40	-11,687.50	-952.64	-1,705.90
26-Jan-24	0.00	-11,687.50	0.00	-1,705.90
29-Jan-24	5,069.88	-6,617.62	609.98	-1,095.92
30-Jan-24	-4,264.40	-10,882.02	-512.86	-1,608.78
31-Jan-24	-1,814.65	-12,696.67	-218.32	-1,827.10
01-Feb-24	1,740.15	-10,956.52	209.45	-1,617.65
02-Feb-24	312.64	-10,643.88	37.69	-1,579.96
05-Feb-24	228.48	-10,415.40	27.58	-1,552.38
06-Feb-24	762.88	-9,652.52	91.88	-1,460.50
07-Feb-24	-472.77	-10,125.29	-56.91	-1,517.41
08-Feb-24	-1,601.32	-11,726.61	-192.99	-1,710.40
08-Feb-24	-4,044.84	-15,771.45	-487.47	-2,197.87
12-Feb-24	330.32	-15,441.13	39.80	-2,158.07
13-Feb-24	220.37	-15,220.76	26.56	-2,131.51
14-Feb-24	233.61	-14,987.15	28.14	-2,103.37
15-Feb-24	-2,628.26	-17,615.41	-316.33	-2,419.70
16-Feb-24	1,143.05	-16,472.36	137.70	-2,282.00

Data Source: NSDL

The week to February 16, 2024 saw FPI outflows of $84 Million, after a brief interlude of buying two weeks prior to that. Here is a quick run-down.

• In last previous 5 rolling weeks, FPIs had seen net outflows of $618 Million, net inflows of $126 Million, net outflows of $1,706 Million, net outflows of $2,033 Million, and net outflows of $110 Million. The latest week saw to February 16, 2024 saw net FPI outflows from equities to the tune of $84 Million, which was more a cautious statement ahead of the upcoming general elections and the elevated levels of VIX in the markets.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from Indian equities were ₹(16,472) Crore or $(2,282) Million. The rolling 4-week flows are still negative, but the intensity of outflows has been certainly reducing.

One clear trend emerging from the FPI flow story is the perceptible shift from equity towards debt. That is logical asset allocation and it is good for the Indian markets.

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 Fed minutes and the RBI MPC minutes will be published, which will give a ringside view of the emerging monetary policy thinking of central banks.

   

• US bond yields and the dollar index have been in a tight range. Any breakout, either ways, would be a key trigger for FPI flows in the coming weeks.

   

• With the worsening Red Sea crisis, FPIs will be closely looking at how the price of crude evolves, with estimates already pegging oil to reach $100/bbl by end of March 2024.

One quick takeaway from the FPI story for the week to February 16, 2024 is that; FPIs are more confident of debt than of equities. That is a defensive bet and may be the base case till the election outcome is in front of us in May 2024.