Weekly Musings – FPI flows for week ended July 21, 2023

22 Jul 2023 , 07:58 PM

It looks like there is no stopping the FPI flows into India. After infusing $11 billion into Indian equities in the months of May and June, the FPIs have infused another $5.4 billion in the first 3 weeks of July with one more week to go. Obviously, July promises to be better than May and June in terms of FPI flows. In short, FPIs have infused over $16 billion into Indian equities since the start of May 2023. What is noteworthy is that, since the start of May 2023, the FPIs have been net buyers in each week and the occasional net selling days have been few and far between. 

To understand the size of the inflow since the start of May, one needs to look at the outflows since the peak of October 2021. In fact, in the 9 months between October 2021 and June 2022, the FPIs saw net outflows of $34 billion. Nearly half of that outflows have been recouped in less than 3 months. Already, FPIs have infused close to $15 billion into equities in calendar 2023 and nearly $17 billion into equity and debt combined. This is despite the FPIs being net sellers in January and February 2023.

What is triggering this FPI enthusiasm?

Broadly, a host of factors have triggered these massive flows into Indian equities. First and foremost, there appears to be a global shift from managing inflation to managing growth. That is what appears to be the thinking of the US Fed also, especially after inflation dipped to a multi-year low of 3% in the US. India had embarked on a pause after February and in retrospect that does look like a decision that made the difference to FPI flows into India. 

Macros have given the benefit of the Goldilocks effect. Inflation has been on a downtrend in India while the IIP has shown a sharp pick-up, led by manufacturing. June may have been an exception for inflation due to the food price surge. Also, GDP estimates for FY24 are better than expected while the current account deficit (CAD) is likely to be more benign than apprehended. Above all, the FPIs are also enthused by the stable rupee as a combination of strong FPI flows and calibrated RBI intervention made the USDINR relatively stable.

Macro FPI flow picture for the week to July 21, 2023

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 #	37,878.76	5,925.27	43,804.03	-673.26	43,130.77
Total for 2023 #	1,03,984.22	16,226.38	1,20,210.60	16,268.55	1,36,479.15
# – July Data is up to July 21, 2023

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

We now have FPI flow data for the first three weeks of July 2023 and the FPIs are clearly and decisively buyers in equity. In the last 80 days, the FPIs have infused more than $16 billion into Indian equities. It has been about equity flows in the last 3 months and debt flows continue to be erratic. FPIs have now infused Rs1.20 trillion into equities in calendar 2023 so far and if you add up equity and debt, the total FPI infusion has been to the tune of Rs1.37 trillion. Debt flows continue to be volatile, but the equity story clearly appears to favour FPI flows into India. (Live equity action on markets page). Let us now look at some the key triggers for robust FPI flows.

• In the aftermath of the US inflation number for June 2023 coming in at 3%, there is a strong expectation among economists in the US and globally, there July could mark the end of this rate hike cycle. A 25 bps rate hike in July is already factored in, if you look at the CME Fedwatch. However, the markets believe that the Fed would not venture beyond that in this round. There are several reasons for the same. Firstly, inflation has come down sharply and continues to fall due to the lag effect of rising rates. That should be enough momentum to carry the inflation rate to a level of 2%, which is the Fed target. In addition, the US must be thankful that its growth pillars have not been affected, consumer demand remains strong and labour is still earning good wages. Markets are now betting that the Fed may hike rates by 25 bps in its July 26, 2023 FOMC meet and then call a halt to rate hikes. That has helped FPI flows.

   

• Two big trades are working in favour of the market in India time around. Firstly, the merger of HDFC Ltd into HDFC Bank will give a boost to banking stocks, which have been the most sought after sector for the FPIs. Also, the demerger of Jio Financial from Reliance Industries indicates that value discovery is still work in progress even in companies with high valuations. That is the good news for FPIs.

   

• Recent trade data suggests that the overall deficit (combining the merchandise deficit and the services surplus) may stay in the range of $7-$8 billion per month on an average. That would be a comfortable scenario in terms of the total current account deficit for the next few quarters. CAD had threatened to go out of control last fiscal, but came under control in the second half. This time around, the CAD looks a lot more predictable and also a lot more palatable. That should hold ratings and the rupee value in good stead in the coming months.

   

• One factor that has favoured the FPI sentiments in recent weeks is the weakness in the dollar as is evident from the dollar index. After dipping below 100, it has bounced back to above the 100 mark, but dollar remains under pressure. That has given stability to the rupee value and FPIs can be rest assured that the dollar value of their rupee investments would now be protected. That has also boosted FPI flows.

Calendar 2023 may have started off on a dull note for FPI flows, but things certainly have reversed since March 2023. As of the mid-July, FPIs have not only offset their selling of January and February, but have also ended up net buyers in equities in 2023 to the tune of nearly $15 billion.

Colour of daily FPI equity flows for last 4 rolling weeks

Each week we look at the last 4 rolling weeks data on FPI flows as it shows us a time series moving average of FPI flows. Check the table below.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
26-Jun-23	199.33	199.33	24.29	24.29
27-Jun-23	-349.33	-150.00	-42.62	-18.33
28-Jun-23	1,830.64	1,680.64	223.35	205.02
29-Jun-23	0.00	1,680.64	0.00	205.02
30-Jun-23	14,803.87	16,484.51	1,805.08	2,010.10
03-Jul-23	11,849.68	28,334.19	1,444.32	3,454.42
04-Jul-23	2,456.38	30,790.57	300.06	3,754.48
05-Jul-23	2,515.33	33,305.90	306.87	4,061.35
06-Jul-23	2,289.64	35,595.54	278.67	4,340.02
07-Jul-23	2,832.79	38,428.33	343.55	4,683.57
10-Jul-23	870.68	39,299.01	105.31	4,788.88
11-Jul-23	1,059.33	40,358.34	128.20	4,917.08
12-Jul-23	1,469.15	41,827.49	178.40	5,095.48
13-Jul-23	-333.60	41,493.89	-40.55	5,054.93
14-Jul-23	5,650.65	47,144.54	688.10	5,743.03
17-Jul-23	3,278.87	50,423.41	399.37	6,142.40
18-Jul-23	504.66	50,928.07	61.43	6,203.83
19-Jul-23	2,527.61	53,455.68	308.06	6,511.89
20-Jul-23	2,193.99	55,649.67	267.23	6,779.12
21-Jul-23	4,638.87	60,288.54	565.41	7,344.53

Data Source: NSDL

The week to July 21, 2023 saw FPI flows of $1.60 billion with bulk of the flows coming on the last 2 days of the week. Based on the 4 weeks of rolling FPI flows into equities, here are some interesting inferences.

• In the previous 3 rolling weeks, FPI infusion into Indian equities has been $2,010 million, $2,673 million, and $1,059 million respectively. In the latest week to July 21, 2023, the FPI flows into Indian equities slightly bounced to $1,602 million.

   

• For the week to July 21, 2023, the FPI net inflows into equities stood at Rs13,144 crore or $1.60 billion. This is lower than the recent weekly average, but FPI flows generally tend to gravitate in the last week and the first week of the month.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total FPI flows into Indian equities were Rs60,289 crore or $7.34 billion. FPI sentiments are also buoyed by relative valuations versus other EMs.

In the last 20 trading sessions during the recent 4 weeks, FPIs were net buyers on 18 days and marginal net sellers on just days. That shows, which way the FPI winds are blowing.

What will FPIs bet on from these levels

Broadly, the FPIs will focus their attention on about 5 major data points to take a decision on how to address the India flow issue.

• The first big trigger will be the FOMC meet on July 26, 2023. A 25 bps rate hike looks on the cards, but if the Fed does hint that July would be the last rate hike in this round, the FPIs are likely to be very enthused.

   

• Quarterly results will continue to guide FPI flows. Banking results have been impressive and numbers of auto, FMCG and capital goods companies are likely to be better than expected. Incidentally, these are the sectors attracting FPI flows.

   

• Global inflation will still be a key factor for FPIs. India saw its inflation bounce in June, but that could be a specific monsoons issue. Central banks like the Bank of England and ECB are still hawkish and that will also be a key factor for FPIs.

   

• A key factor will be how the government of India handles its reforms process with just about one year to go for central elections. If the government can continue its reformist agenda, the FPIs have reasons to celebrate.

   

• Last, but not the least, FPIs would be closely watching the global oil prices. Crude has the ability to put pressure on the Indian economy due to India depending on imported crude for 85% of its needs. Rangebound crude would be the best choice for FPIs.

The sectoral concentration of FPI flows in the last couple of months has a common thread. The FPIs are positive on financials, automobiles, FMCG and capital goods. However, they have stayed neutral to negative on IT and metals. How these sectors deliver numbers in Q1FY24, will be a key data point for the FPI flows.