Weekly Musings – FPI flows for week ended January 05, 2024

8 Jan 2024 , 09:25 AM

FPIs infuse subdued $574 million in the week to January 05, 2024

The week to January 05, 2024 was another bumper week for FPI flows. After starting off with a bang in the last week of November, FPIs have seen weekly infusions gradually coming down as the year came to an end. In the current week to January 05, 2024, the FPIs infused $574 million into equities. However, in the five weeks prior to that, the FPIs have put into $9 billion into Indian equities. For instance, FPIs had infused $1.06 billion, $1.75 billion, $1.95 billion, $2.01 billion, and $2.20 billion in the five weeks prior to the current week. The month of December also saw the FPIs infuse close to $8 billion into Indian equities, one of the best months in recent memory.

There have been several reasons for the tapering of FPI flows in the last 2 weeks. The year end is normally the time when FPIs take it easy and prefer to rest on their laurels. That last thing they would want to do is to get stuck in an illiquid market and spoil the returns they have already made during the year. Remember, the FPI AUC (assets under custody) has rallied from $630 billion to $737 billion between October 2023 and December 2023. That is a lot of value created; substantially more than the flows they have infused into India in this period. Obviously, the inflows have come in from capital appreciation in the Nifty and the Sensex, but the truth is that the AUC has spiralled in the last two months to a new peak. The real picture of January flows will be visible from the second week onwards.

Big Story: Fed minutes delivered the goods; not the goodies

When the Fed minutes of the December 2023 meeting were published, there were a lot of expectations. The markets were hoping that the Fed would lay out an elaborate timetable of rate cuts; or at least, give an indication of how many rate cuts would be likely in 2024. However, the Fed did not offer any timetable. Not only that, the Fed even avoided any clear commitment that it would commence the rate cutting process in the near future. Now, even the CME Fedwatch expects the rate cuts to get back ended and get concentrated in the second half of 2024. Already, the CME Fedwatch has cut its estimate of rate cuts in 2024 from 175 bps to 150 bps, while it is increasing the probability that the Fed hold the rates higher for a longer period. The impact was also visible in the dollar index and the US bond yields hardening during the week. It is too early to say if it would continue to impact FPI flows in the coming weeks, but that was surely the key issue in first week of January 2024.

What impacted FPI sentiments in the week to January 05, 2024?

After infusing nearly $8 billion in the four weeks to December 22, 2023, the FPI slowed down their pace of infusion to just about $1.6 billion in the two recent weeks. That is not a very sharp slowdown, but it does raise question on whether the pace of December will continue as far as FPIs are concerned. Here are the 5 factors that influenced FPI flows during the week.

1. The Red Sea crisis remained the dominant topic impacting the FPI flows in the latest week. As the war between Israel and Hamas intensified, the attacks by Houthi rebels on Red Sea cargo also intensified. This has already resulted in a sharp spike in the insurance costs and the freight costs on the Red Sea route as the shippers are factoring in the higher risk of sailing through this route. Red Sea is the lifeline of trade for Asia with the US and Europe. In fact, chunk of the world trade passes through this route and that was evident in the spike in oil prices. One news item that would impact sentiments in the medium term is the decision by the shipping giant, Maersk of Denmark, to avoid the Red Sea route. If ships take the Horn of Africa route instead, the costs could go up significantly. Either ways, FPIs have been worried about its impact as India still relies on imports to meet about 80% of its daily crude requirements. 

    

2. The other key factor this week was the Fed minutes, which largely disappointed the markets. Of course, the markets were expecting that the Fed would go out and aggressively provide a time table on rate cuts. However, there was nothing of that kind in the minutes. Also, the language of the Fed continues to be ambiguous; about the actual act of starting the rate cuts and the timing of the rate cuts. As a result, even the CME Fedwatch turned a little cautious during the week and reduced its estimate of rate cuts from 175 bps in 2024 to 150 bps in 2024. Already, analysts have started remarking that the CME Fedwatch may have become unnecessarily optimistic about rate cuts. That has not gone down well with the FPI sentiments.

    

3. Towards the end of the week, the MOSPI announced the first advance estimate of FY24 GDP at 7.3%. That is 10 bps higher than the FY23 estimates and a full 30 bps higher than the RBI estimate for FY24 GDP growth. That is good news, but there is a problem. The growth in real GDP has come largely from lower inflation since nominal GDP growth has fallen sharply. It is estimated at just 8.9% in FY24, compared to 15.5% in FY23. That is likely to have an impact on economic activity and the tax collections. While the data came out late on Friday, most FPIs have already factored in the reality that nominal growth in GDP in FY24 could be sharply lower than in FY23. That had also impacted FPI sentiments in the previous week.

    

4. FPIs were a little cautious ahead of the IT company results expected in the coming week. This week, TCS, Wipro and HCL Tech will be announcing their Q3 results. The broad indication is that the sector is likely to be under pressure in terms of constant currency growth in top line, which is likely to taper to around 1.6% in the quarter. That is likely to keep the IT stocks under pressure and, considering their weightage, also keep the Nifty under pressure. There is some caution on the growth in IT and also in banking in the third quarter and that has been weighing on FPI sentiments in the recent week.

    

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 jumped above 4% after staying under 4% for nearly 3 weeks. This was after the Fed did not give any indication about the timetable for rate cuts. As a result, even the dollar index hardened to well above the 102 levels, even as the rupee stayed under pressure at around the 83.30/$ levels. That led to some pressure on FPI buying as it would impact their dollar denominated returns.

Apart from these, there is also going to be a sense of tiredness in FPIs after infusing $9 billion in the previous 5 weeks. With elections coming up, the FPIs may now wait for a clear pre-election survey to commit the next round of funds to the Indian markets.

Macro FPI flow picture up to January 05, 2024

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	58,372.70	7,761.96	66,134.66	18,402.77	84,537.43
Total for 2023 (₹ cr)	1,27,759.75	43,347.14	1,71,106.89	65,954.38	2,37,061.27
Total for 2023 ($ bn)	15.501	5.242	20.743	7.960	28.703
Jan-2024 #	3,955.09	818.23	4,773.32	1,577.52	6,350.84
# – Recent Data is up to January 05, 2024

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

In the months of 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 more than offset by the FPI buying in the secondary markets in December 2023 to the tune of Rs58,373 crore. What also matters is that in December, the secondary markets contributed 88% of the flows with the IPOs just contributing the balance 12%. 

At the same time, the debt markets also saw net inflows of Rs18,403 crore in December 2023. This is on top of Rs15,546 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, to the tune of Rs2.37 trillion is a good 78.5% higher than the 2022 net outflows of Rs1.33 trillion. 

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
11-Dec-23	3,993.95	3,993.95	479.08	479.08
12-Dec-23	871.91	4,865.86	104.56	583.64
13-Dec-23	2,588.08	7,453.94	310.40	894.04
14-Dec-23	5,300.35	12,754.29	635.57	1,529.61
15-Dec-23	3,473.78	16,228.07	416.77	1,946.38
18-Dec-23	10,237.19	26,465.26	1,230.73	3,177.11
19-Dec-23	1,786.51	28,251.77	215.19	3,392.30
20-Dec-23	1,859.92	30,111.69	223.61	3,615.91
21-Dec-23	2,007.33	32,119.02	241.40	3,857.31
22-Dec-23	-1,311.16	30,807.86	-157.45	3,699.86
25-Dec-23	0.00	30,807.86	0.00	3,699.86
26-Dec-23	-576.06	30,231.80	-69.19	3,630.67
27-Dec-23	537.51	30,769.31	64.62	3,695.29
28-Dec-23	3,203.24	33,972.55	384.43	4,079.72
29-Dec-23	5,656.82	39,629.37	679.70	4,759.42
01-Jan-24	2,107.64	41,737.01	253.58	5,013.00
02-Jan-24	253.24	41,990.25	30.44	5,043.44
03-Jan-24	1,594.76	43,585.01	191.39	5,234.83
04-Jan-24	-571.52	43,013.49	-68.59	5,166.24
05-Jan-24	1,389.20	44,402.69	166.77	5,333.01

Data Source: NSDL

The week to January 05, 2024 was the second week of subdued FPI inflows after 4 consecutive weeks of elevated FPI flows. FPIs infused just $574 million in the latest week to January 05, 2024. Here is a quick look at the FPI flows story on a weekly basis.

• In last 5 rolling weeks, FPIs saw inflows of $1.06 billion, inflows of $1.75 billion, inflows of $1.95 billion, inflows of $2.01 billion, and inflows of $2.20 billion into Indian equities. The latest week saw net FPI inflows of a subdued $574 million, due to year-end effect.

   

• 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 Rs44,403 crore or $5,333 million. FPI flows in the last two weeks have been relatively subdued compared to the previous 4 weeks.

What will drive FPI flows in the coming weeks?

There will be 3 key drivers of FPI flows in the next week.

• There are some important data points in the coming week like India inflation, India IIP, and the US CPI inflation. They will have an impact on the FPI flows next week.

   

• The quarterly results season for Q3 will commence. The FPIs will be looking out for cues from the IT and banking sector; which are likely to see some pressure in Q3FY24.

   

• The Red Sea crisis will continue to hold centre-stage. However, the real question is whether it will have an escalating impact on the price of Brent crude?

One quick takeaway from the FPI story for the first week of January 2024 is that; the undertone of FPIs remains positive. However, markets are at life-time highs, there is election volatility coming and the geopolitical situation in West Asia is not getting any better. It could be touch and go for FPIs in coming weeks.