Weekly Musings – FPI flows for week ended January 19, 2024

22 Jan 2024 , 08:15 AM

FPIs LIGHTEN INDIAN EQUITIES IN WEEK TO JANUARY 19, 2024

The week to January 19, 2024 was the second week of FPI outflows. After being net sellers worth $110 million in the previous week, the latest week saw heavy FPI selling to the tune of $2,033 million. That is a far cry from the $9 billion infused into Indian equities in the month of December 2023. In the six weeks prior to that, the FPIs had infused $574 million, $1.06 billion, $1.75 billion, $1.95 billion, $2.01 billion, and $2.20 billion into Indian equities. 

One can argue that the sell-off in the last two weeks is almost nothing in relative terms. The real question is; whether this is just a blip in the FPI flow story or whether this is indicative of a shifting trend in FPI flows. We have to observe data for a few more weeks to be able to come to any substantive conclusion on this issue. However, it does look like the FPIs have been using news at higher levels to lighten their India positions. 

WHAT TRIGGERED THE FPI SELL-OFF THIS WEEK?

Broadly, there were 3 factors at play as far FPI flows in the latest week to January were concerned. Firstly, it must be remembered that at the close of December 2023, the FPI assets under custody (AUC) had risen to record levels of $737 billion. This is nearly 15% higher than the previous peak reported in October 2021. That is surely a signal to the FPIs to lighten positions. The second reason had to do with below average results from heavyweights. Hindustan Unilever reported tepid growth in revenues and profits as rural sales struggled and Reliance saw its O2C (oil to chemicals) business struggle, even as telecom and retail made up for the disappointment of O2C. 

However, the swing factor that triggered the FPI selling was the HDFC Bank quarterly numbers. Not only did the deposit growth lag credit growth, but even the NIM was way below expectations and substantially lower than that of ICICI Bank. Selling in the HDFC Bank counter was a big reason for FPI selling last week. Thirdly, there was the issue of rising US bond yields, which also had a negative impact on the FPI flows in to Indian equities in the latest week. We will look at this point separately in the subsequent paragraph.

BIG STORY: US BOND YIELD SPIKE HITS FPI SENTIMENTS

The US bond yield spike was substantial. From a level of around 3.92%, the bond yields in the US market spiked to 4.14% in the current week. In retrospect, that is a substantial spike after we had seen the US bond yields taper from 5.0% to 3.9%. However, that fall was on the assumption that the Fed would front-end the rate cuts and push down the cost of funds. Things have change in the last few weeks. Firstly, the US consumer inflation came in nearly 30 bps higher at 3.4% for December 2023. That was sharply higher than expected. 

Even the PCE inflation is expected to stay flat at 2.6%, despite the core PCE falling sharply by 20 bps. The data is expected towards the end of this week. However, this changed scenario led the Fed members to take a slightly hawkish stance in their speeches in the last few days. That impact is also visible in the more cautious stance of the CME Fedwatch. It has reduced its rate expectation for 2024 from 175 bps to just 125 bps. Higher bond yields mean; equities are less attractive in relative terms and that is forcing the FPIs into cautious mode.

FPI SENTIMENTS – THE WEEK THAT WAS

The week saw FPI selling of $2.033 billion with FPIs selling heavily in last 2 days of the week. It was an extended 6-day trading week with Saturday also a full trading day as Monday is a trading holiday on account of the inauguration of Ram Temple at Ayodhya. Here are the 5 key data points that influenced FPI action in the week to January 19, 2024.

1. The WPI inflation or wholesale inflation, came in sharply higher at 0.73% for December 2023. Like the consumer inflation, even the WPI inflation was pushed higher by the spike in food inflation. It may be recollected that WPI inflation had turned into positive territory only in November 2023, after being in the negative zone for 7 months between April 2023 and October 2023. However, December saw the WPI inflation spiking sharply to 0.73%. A spike in WPI inflation has two implications. Firstly, it is likely to eventually spread to CPI inflation and secondly it means that producers will get a good price.

    

2. Trade data for December 2023 was also announced during the week. The merchandise trade deficit fell below the $20 billion mark, which is good news. However, the surplus on the services account was lower on a yoy basis and also on a sequential basis. That is due to the pressure on service exports; especially IT exports due to slowdown in tech funding. The good news is that the Red Sea crisis has not shown any impact on the exports, although trade exports feel that the impact will be more visible from January 2024 data onwards. The overall impact is likely to be about $30 billion on exports, and that is substantial. However, the good news is that the current account deficit for FY24 could well be within the 1.5% of GDP limit, which is a fairly comfortable level.

    

3. The Q3FY24 results had several disappointments and that also took a toll on the FPI flows. Among the big names, Hindustan Unilever saw the impact of the rural slowdown even as sales growth and profit growth were flat. The food business did well while the growth in home care and personal care businesses were tepid. Reliance Industries announced stellar numbers on the digital business and the retail business. However, the bread-and-butter O2C (oil to chemicals) business came under pressure in the quarter. The big disappointment was on HDFC Bank, which has been on the radar ever since it absorbed HDFC Ltd. The impact was visible as the credit growth lagged the deposit growth. The net interest margin (NIM) of HDFC Bank at 3.4% was sharply lower than 4.41% NIM for ICICI Bank. Clearly, the sell-off in HDFC Bank was the swing factor that tilted the FPIs towards aggressive selling mode in the latest week.

    

4. Pre budget expectations and concerns were a major swing factor in the week, which also influenced FPI flows. Being the last budget before the elections (an interim budget), the FPIs are likely to play it safe till there is some clarity from the pre-poll estimates and later from the exit polls. There are also some concerns on the upcoming Union Budget. The government has a target of keeping fiscal deficit at 5.9% of GDP. While it appears to be on target as of late November, there are concerns over the level of nominal GDP as per the first advance estimates (FAE) for FY24. Lower nominal GDP would mean tax revenues overall would lag estimates and there is the possibility that FY24 may see fiscal deficit spike to 6.0%. As a result, the government may cut capex spending in FY25 to ensure that the glide path to 5.3% and 4.5% are achieved in the next 2 years. Lower capex expectations had spooked a number of FPIs in the latest week.

    

5. Finally, we look at the 3 high frequency global factors that normally tend to impact the FPI flows into India. Firstly, not much has changed on the Red Sea front. The risk is still there, although it now looks fairly manageable. The second major issue is the spike in the US bond yields. That spiked by more than 20 bps in this week and that had a clear impact on the FPI flows in the week. Bond yields in the US spiked after the chances of aggressive rate cuts by the Fed were becoming increasingly remote. Thirdly, the US dollar index (DXY) was also marginally up and that led to the rupee once again weakening beyond the 83/$ levels. That also had an impact on FPI flows this week.

FPIs may adopt a wait-and-watch stance till the Union Budget is announced and they get a feel of the direction that the reforms process is taking.

MACRO FPI FLOW PICTURE UP TO JANUARY 19, 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 #	(15,134.45)	2,087.57	(13,046.88)	13,180.45	133.57
Total for 2024 (₹ cr)	(15,134.45)	2,087.57	(13,046.88)	13,180.45	133.57
Total for 2024 ($ bn)	(1.821)	0.251	(1.570)	1.588	0.018
# – Recent Data is up to January 20, 2024

Data Source: NSDL (Negative figures in brackets)

The first 2 weeks of January 2024 saw net FPI inflows of $133.57 million. However, that was more because aggressive FPI inflows into debt offset the heavy selling by FPIs in Indian equities. Of course, these are early days for 2024 and we will need more data points. However, a comparison of 2023 and 2022 is fairly interesting. Total equities saw outflows of Rs1.21 trillion in year 2022, but that was offset by equity inflows of Rs1.71 trillion in 2023. If you look at combined flows of equity and debt; 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
25-Dec-23	0.00	0.00	0.00	0.00
26-Dec-23	-576.06	-576.06	-69.19	-69.19
27-Dec-23	537.51	-38.55	64.62	-4.57
28-Dec-23	3,203.24	3,164.69	384.43	379.86
29-Dec-23	5,656.82	8,821.51	679.70	1,059.56
01-Jan-24	2,107.64	10,929.15	253.58	1,313.14
02-Jan-24	253.24	11,182.39	30.44	1,343.58
03-Jan-24	1,594.76	12,777.15	191.39	1,534.97
04-Jan-24	-571.52	12,205.63	-68.59	1,466.38
05-Jan-24	1,389.20	13,594.83	166.77	1,633.15
08-Jan-24	1,769.05	15,363.88	212.69	1,845.84
09-Jan-24	285.00	15,648.88	34.31	1,880.15
10-Jan-24	-537.06	15,111.82	-64.61	1,815.54
11-Jan-24	-1,650.78	13,461.04	-198.52	1,617.02
12-Jan-24	-775.46	12,685.58	-93.50	1,523.52
15-Jan-24	-430.73	12,254.85	-51.90	1,471.62
16-Jan-24	2,015.34	14,270.19	243.24	1,714.86
17-Jan-24	1,181.73	15,451.92	142.41	1,857.27
18-Jan-24	-10,482.64	4,969.28	-1,260.97	596.30
19-Jan-24	-9,194.65	-4,225.37	-1,106.13	-509.83

Data Source: NSDL

The week to January 19, 2024 was the second week of negative FPI inflows into equities. FPIs took out $2,033 million in the latest week. Here are key takeaways.

• In last previous 5 rolling weeks, FPIs saw net outflows of $110 million, net inflows of $574 million, net inflows of $1.06 billion, net inflows of $1.75 billion, and net inflows of $1.95 billion. The latest week saw net FPI outflows of $2,033 million, which was largely triggered by Q3 disappointments and US bond yields spiking.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from Indian equities were Rs(4,225) crore or $(510) million. The rolling 4-week flow is turning negative after more than 10 weeks.

WHAT WILL DRIVE FPI FLOWS IN THE COMING WEEKS?

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

• The ongoing Red Sea crisis and its likely impact on export volumes and import costs is likely to hold the key to FPI flows.

   

• More than the quarterly results, the focus next week would be more on the US bond yields and whether it dips below 4% or stays higher.

   

• Key US data points like the first advance estimate of Q4 GDP and PCE inflation for December 2023 will be closely watched by FPIs.

One quick takeaway from the FPI story for the week to January 19, 2024 is that; FPIs are getting impatient. With markets at life-time highs, election uncertainty, and elevated geopolitical risk; FPI sentiments are likely to be volatile.