Weekly Musings – FPI flows for week ended January 12, 2024

15 Jan 2024 , 11:32 AM

FPIs withdraw $110 million in the week to January 12, 2024

The week to January 12, 2024 was a week of FPI outflows for the first time since November, when the turnaround in FPI sentiments actually started. In the last six weeks, the FPIs had infused $574 million, $1.06 billion, $1.75 billion, $1.95 billion, $2.01 billion, and $2.20 billion into the current week. In contrast, the latest week to January 12, 2024, saw FPI outflows of $110 million. To be fair, this is hardly anything in relative terms. An outflows of $100 million in FPI data, after they infused $9.54 billion in the previous 6 weeks, is just about a 1% outflow in comparison. That is, at best, insignificant. However, the million dollar question whether, this is just a blip in the FPI flow story or whether this is indicative of a shifting trend in FPI flows, when they gradually beat a retreat out of Indian stocks.

FPIs being cautious in the first two weeks of January is nothing abnormal. That generally happens every year. This is the time when FPI reallocate some of their monies and some allocation out of India and into other EMs is inevitable considering that other markets do look optically cheaper than India based on P/E ratio. Also, the FPIs would be look to paring some of the record AUM levels achieved last month. At the close of December 2023, the FPI assets under custody (AUC) stood at $737 billion; having rallied by $107 billion between October and December. It is only obvious that the FPIs are monetising some of these gains. While January flows have traditionally been slightly tentative, there are also concerns about the colour of the Union Budget to be announced in February. If the FPIs get the picture that the reforms program of the government is on track, we could see flows come back in February and March. However, volatility will be high till the general elections in mid-2024.

Big Story: A tale of two inflations and FPIs are playing it safe

The US and India reported consumer inflation during the current week. Both the inflation readings were higher than the previous month readings. For instance, the Indian inflation reading for December was 14 bps higher while the US inflation reading was a full 30 bps higher. What is worrying for the FPIs is that such spikes in inflation is only taking the actual inflation farther from the targets. A wide gap from the target rate would, once again, impel the central banks to focus on a hawkish strategy. Typically, equity investors have preferred the rates to be stable or trending lower since that expands the value of equity in terms of future cash flow discounting. In India, the industrial growth was also sharply lower, but that is more of a base effect than anything else. The big geopolitical risk as the FPI see is the Red Sea crisis with the Indian exports likely to be conservatively hit by $30 billion for FY24. The actual figure could be much higher and we are not even talking about the impact that the crisis could have in terms of imported inflation. These were the risk factors.

What impacted FPI sentiments in the week to January 12, 2024?

FPI flows were negative in the latest week, but $110 million of outflows is almost nothing if you compare with the $9.54 billion of inflows in the six weeks prior to that. However, it is important to understand the factors that impacted the FPI flows during the week. Out of the 5 trading days, the FPIs were buyers in the first two days, but sold in the last 3 days of the week. Here are the 5 factors that influenced FPI flows during the week.

1. The US inflation number was a key factor in the FPI flows story. For the month of December 2023, the US consumer inflation came in 30 bps higher at 3.4%, compared to 3.1% in the previous month. That is a sharp spike and the spike in inflation was largely led by fuel inflation. The fuel inflation was already in the negative, but it became less negative, which is tantamount to higher fuel inflation. However, food inflation and core inflation were actually lower in December, with the US December core inflation falling below 4% after a long time. The higher inflation reading did raise concerns that the US Fed may revisit its rate cuts targets for the year and that kept the FPIs on tenterhooks for the week. More clarity will emerge when the Fed speak offers some clarity.

    

2. India inflation also came in higher at 5.69%. The December inflation reading in India was 14 bps higher than the November reading. However, the good news was that it was lower than the street expectation of consumer inflation at 5.87%. Food inflation has been a major factor in rising inflation in December, with the food inflation reading going up further from 8.70% to 9.53%. Most of the pressure is coming from cereals, pulses, vegetables, and fruits; all a function of weak output and supply chain constraints. The persistently high food inflation also throws light on the inability of the policy makers to rein in food prices, which continues to rise, even as core inflation fell to a 30 month low in the month of December 2023.

    

3. The index of industrial production (IIP) fell sharply to 2.4% in November 2023 compared to 11.6% in October 2023. Unlike inflation, the IIP is reported with a lag of 1 month. The sharp fall in IIP in the month of November pertains to the high base effect. The previous had Diwali in October while 2023 had Diwali in November. This dichotomy created a sharply higher base of 7.58% leading to weak IIP in the latest month. However, if the impact of Diwali was neutralized, then the growth in IIP would have been closer to 7%, which is in tune with the long term average. That is unlikely to have impacted FPI sentiments beyond a point, as it is more of an accounting adjustment.

    

4. The Red Sea crisis may have taken a back seat, but it is starting to show its impact on the global macros, and India is no exception. As the war between Israel and Hamas intensifies, the attacks by Houthi rebels on Red Sea cargo also intensified. This led to a sharp spike in the insurance and freight costs on the Red Sea route; with the likes of Maersk of Denmark opting out of the troubled route. That creates a unique problem for India. The Suez Canal route is not only key for Indian exports, but the Red Sea remains a key conduit for Indian oil imports. Indian exports are likely to by nearly $300 billion in FY24 due to the Red Sea crisis. The bigger question is; what will be the impact of the crisis on oil imports and the chances of imported inflation. With the advantage of Russian oil fading, India has to now increasingly depend on the Middle East oil  for meeting its massive crude oil needs. After all, with record refining capacity, India still depends on crude imports to meet over 80% of its needs.

    

5. One data point that the FPIs would be keeping an eye on is the progress on the quarterly results The big IT names announced results during the week. Both TCS and Infosys saw constant currency growth in revenues lower than expected, although the operating margins were better than expected. Both the companies have, however, cut the flab in the workforce with a sharp reduction in their manpower during the year. The day of results, Infosys ADS was sharply up and the Indian IT index rallied over 4.4% on Friday, leading the index rally. Clearly, hopes of a stronger dollar are helping.

Apart from these, there is also going to be a sense of tiredness in FPIs after infusing $9.54 billion in the previous 6 weeks. With elections coming up, the FPIs may wait for a clear pre-election survey to commit the next round of funds to the Indian markets. The first signal will come from the Union Budget on February 01, 2024.

Macro FPI flow picture up to January 12, 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 #	2,743.43	1,120.64	3,864.07	5,170.34	9,034.41
Total for 2024 (₹ cr)	2,743.43	1,120.64	3,864.07	5,170.34	9,034.41
Total for 2024 ($ bn)	0.329	0.135	0.464	0.622	1.086
# – Recent Data is up to January 12, 2024

Data Source: NSDL (Negative figures in brackets)

The first 2 weeks of January 2024 saw net FPI inflows of $1.09 billion. However, 60% of these inflows came from debt with just about 40% coming from equity inflows. Of course, these are early days for 2024 and we will need more data points. However, a comparison of 2023 and 2022 are rather interesting. Total equities saw outflows of Rs1.21 trillion in year 2022, but that was offset by equity inflows of Rs1.71 trillion in year 2023. If you look at overall flows of equity and debt, then year 2022 saw net outflows of Rs1.33 trillion, which was more than offset by overall inflows of Rs2.37 trillion in 2023. 

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
18-Dec-23	10,237.19	10,237.19	1,230.73	1,230.73
19-Dec-23	1,786.51	12,023.70	215.19	1,445.92
20-Dec-23	1,859.92	13,883.62	223.61	1,669.53
21-Dec-23	2,007.33	15,890.95	241.40	1,910.93
22-Dec-23	-1,311.16	14,579.79	-157.45	1,753.48
25-Dec-23	0.00	14,579.79	0.00	1,753.48
26-Dec-23	-576.06	14,003.73	-69.19	1,684.29
27-Dec-23	537.51	14,541.24	64.62	1,748.91
28-Dec-23	3,203.24	17,744.48	384.43	2,133.34
29-Dec-23	5,656.82	23,401.30	679.70	2,813.04
01-Jan-24	2,107.64	25,508.94	253.58	3,066.62
02-Jan-24	253.24	25,762.18	30.44	3,097.06
03-Jan-24	1,594.76	27,356.94	191.39	3,288.45
04-Jan-24	-571.52	26,785.42	-68.59	3,219.86
05-Jan-24	1,389.20	28,174.62	166.77	3,386.63
08-Jan-24	1,769.05	29,943.67	212.69	3,599.32
09-Jan-24	285.00	30,228.67	34.31	3,633.63
10-Jan-24	-537.06	29,691.61	-64.61	3,569.02
11-Jan-24	-1,650.78	28,040.83	-198.52	3,370.50
12-Jan-24	-775.46	27,265.37	-93.50	3,277.00

Data Source: NSDL

The week to January 12, 2024 was the first week of negative FPI inflows into equities since the second week of November 2023. FPIs took out $110 million in the latest week to January 12, 2024. Here is a quick look at the FPI flows story on a weekly basis.

• In last previous 5 rolling weeks, FPIs saw net inflows of $574 million, inflows of $1.06 billion, inflows of $1.75 billion, inflows of $1.95 billion, and inflows of $2.01 billion into Indian equities. The latest week saw net FPI outflows of $110 million, but that is actually quite insignificant in the context of the $9.54 billion inflows in previous 6 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 Rs27,265 crore or $3,277 million. FPI flows in the last two weeks have been relatively subdued.

What will drive FPI flows in the coming weeks?

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

• The India trade data will show the first signs of the Red Sea impact on exports and import costs. That will be the key to FPI flows.

   

• The quarterly results season for Q3 IT has been well received. The next week will see other heavyweight sectors also chipping in.

   

• The Fed speak will be closely watched next week in the aftermath of higher US inflation. That will drive FPI sentiments on EMs.

One quick takeaway from the FPI story for the second week of January 2024 is that; no significant shift is visible. However, markets are at life-time highs, there is election volatility coming and geopolitical risk is elevated. FPI sentiments are likely to be on the boil!