Weekly Musings – FPI flows for week ended July 26, 2024

29 Jul 2024 , 11:12 AM

FPIS TURN AGGRESSIVE SELLERS POST UNION BUDGET

In the latest week to July 26, 2024, the FPIs continued to be net buyers in the equity markets. However, after being net buyers in the first two days of the week, the FPIs turned net sellers in the last 3 days of the week post the Union Budget. At the end of the week, the FPIs were still net buyer to the tune of $349 Million. However, this included net infusion of $1,216 Million in the first two days of the week and net selling of $867 Million in the last three days post the budget announcement. However, it cannot be gainsaid that this was the seventh consecutive week of net buying by FPIs in Indian equities.

In the last 6 weeks, the FPIs were net buyers of $1.85 Billion, $885 Million, $953 Million, $1.41 Billion, $1.83 Billion, and $1.72 Billion . In short, FPIs have infused an imposing $9.04 Billion in the last 7 weeks since the formation of the Modi 3.0 government at the centre in the first week of June. With the Modi government being voted back to power, albeit with a much thinner mandate, the FPIs were convinced that the reforms were here to stay. However, in the latest week to July 26, 2024, the sentiments of FPIs did change in the latter part of the week, post the full budget.

WHY DID THE FULL BUDGET SPOOK FPI SENTIMENTS?

In fact, there were a number of announcements in the Union Budget that spooked the FPIs and led to a bout of selling in the last 3 days of the week. Here is a quick look at the drivers of the market correction post the budget announcement.

• The fiscal deficit was further reduced to 4.9% of GDP in the full budget. However, the FPIs were more concerned that the government had announced a massive relief package for the states of Bihar and Andhra Pradesh as part of the coalition Dharma. A spike in food subsidies also put pressure on markets.
• The spike in the capital gains tax was one of the factors. The rate of short capital gains tax was raised from 10% to 12.5% while the rate of long term gains was raised from 15% to 20%. Both are likely to impose a higher burden of investors and impact the market liquidity in the short term.
• The third factor was the securities transaction (STT) on F&O. The STT on options was hiked nearly 16-fold while the STT on futures selling was also raised by 60%. This was intended to curb retail speculation in F&O, but the FPIs are sceptical that it would impact liquidity and also make hedging of risk costlier.

Of course, an important trigger for FPI outflows had nothing to do with the budget. The US data on GDP and PCE inflation increased the likelihood of a rate cut in September. This would create a lot of tumult in global flows. We have to wait and watch!

MACRO FPI FLOW PICTURE UP TO JULY 26, 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)	(3,194.72)	4,733.60	1,538.88	30,277.95	31,816.83
Mar-2024 (₹ Crore)	29,152.54	5,945.78	35,098.32	16,987.88	51,996.20
Apr-2024 (₹ Crore)	(23,331.04)	14,659.77	(8,671.27)	(7,588.75)	(16,260.02)
May-2024 (₹ Crore)	(30,613.87)	5,027.54	(25,586.33)	12,675.47	(12,910.86)
Jun-2024 (₹ Crore)	24,345.55	2,218.99	26,564.54	15,192.90	41,757.44
Jul-2024 (₹ Crore) #	27,236.66	6,451.24	33,687.30	15,516.97	49,204.27
Total for 2024 (₹ Crore)	(5,268.77)	42,157.26	36,888.49	1,02,122.03	1,39,010.52
For 2024 ($ Million)	(614.64)	5,063.83	4,449.19	12,280.16	16,729.35
# – Recent Data is up to July 26, 2024

Data Source: NSDL (Negative figures in brackets)

FPIs remained net buyers in the week to July 26, 2024 at $349 Million after being net buyers to the tune of $1,845 Million, $885 Million, $953 Million, $1,724 Million, $1,825 Million, and $1,405 Million in the previous 6 weeks. For calendar 2024 so far, FPIs were net buyers to the tune of $16,729.35 Million. Out of this figure, FPIs net bought equities worth $4,449.19 Million and were net buyers in debt to the tune of $12,280.16 Million. For 2024, till date, net debt market inflows accounted for 73.4% of the total net FPI flows into India. In short, year 2024 has been more about debt flows and less about equity flows; although the dominance of debt flows have fallen from above 95% to under 75%. As of the close of July 26, 2024, the FPIs were still net sellers in secondary market equities worth $(614.64) Million, while the buying in IPOs more than compensated for that at $5,063.83 Million.

Had the budget even been neutral, the latest week to July 26, 2024 would have been another week of impressive FPI flows. In fact, FPIs infused $1.22 Billion in the first two days of the week, before the Union Budget came and spoilt the sentiments. However, the week still ended with net FPI buying in equities to the tune of $349 Million making the FPIs net buyers for the seventh week in a row. Since the Modi 3.0 government assumed office, the FPIs have infused $9.04 Billion into Indian equities. Let us now turn to the major news flows that impacted the FPI sentiments in the week.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to July 26, 2024, FPIs were net buyers to the tune of $349 Million. For 7 weeks in a row, the FPIs have been net buyers in equity; infusing $9.04 Billion in the process. Here is what drove FPI sentiments this week.

• The big news in the week was the announcement of the full union budget by the finance minister on the floor of the house. The first major budget item that influenced FPI flows was the revision to the fiscal deficit estimate. Thanks to the RBI largesse of ₹2.11 Trillion as dividends, the government has decided to further reduce the fiscal deficit target to 4.9% of GDP, as against the interim budget target of 5.1%. This would be a full 100 bps lower than the original FY24 estimates. However, that glossed over by the massive allocations done by the government to Bihar and Andhra Pradesh. Both state CMs are critical coalition partners, so the linkage is unmissable. Also, a spike in food subsidy bill looks inevitable this year.
• A hike in the capital gains tax rates also had an impact on FPI sentiments. The short term capital gains tax on equities, which currently stands at 15%, has been revised upwards to 20%. At the same time, the long term capital gains tax rate has also been raised on equities from 10% to 12.5%. The budget has some consolation in the form of a higher base exemption limit on long term capital gains from ₹1.00 Lakhs per annum to ₹1.25 Lakhs per annum. However, the overall impact on retail and institutional sentiments is still going to be there.
• The other factor that impacted the FPI sentiments in the Union Budget was the securities transaction tax (STT) on futures & options transactions. The STT on the premium value of option contract selling has been increased 16-fold from 0.0625% to 0.1%. This is likely to deeply impact the economics of options trading, especially considering that the index options are the most liquid instrument on the stock exchanges and are extensively used by the FPIs to hedge positions. Simultaneously, the STT on futures selling has also been raised from 0.0125% of notional value to 0.02%, which represents a 60% increase in the STT cost on futures. This is likely to impact the futures market liquidity; as well as the arbitrage and roll cost for FPIs.
• The US Bureau of Economic Analysis (BEA) announced the first advance estimate of GDP growth for Q2 i.e. the quarter ending June 2024. At 2.8%, the advance estimate of GDP growth was double the first quarter GDP growth of 1.4%. Of course, the GDP growth is still lower than the 4.9% and 3.4% GDP growth achieved by the US in the third and fourth quarters of 2023. However, this bounce shows resilience and is indicative of the fact that the hard landing of the US economy has been well and truly avoided.
• The week also saw the PCE inflation being announced in the US for the month of June 2024. While the consumer inflation had fallen by 30 bps, the PCE inflation fell by just about 10 bps to 2.5%. In terms of the components of the PCE inflation, while core inflation was flat and food inflation was marginally higher, the energy inflation was sharply lower for the second month in a row. Thanks to tapering crude oil prices, the pressure on the oil basket is coming down in the US and that is making the energy basket less of a burden on the American consumer. If you combine the impact of the healthy GDP number and the lower PCE inflation, the setting is perfect for the Fed to cut rates in September, if not on July 31. In fact, the CME Fedwatch has already assigned a 100% probability to the first rate in September and a highly affirmative second rate cut in December 2024.
• It looks like the inflation problem is not going away in a hurry in India, and the concerns continue to be on the food inflation front. The government has made an allocation of ₹10,000 Crore to the inflation control war chest and that shows the seriousness of the problem. With a coalition government at the centre and a slew of important state elections coming up in Maharashtra, Haryana, and Jharkhand; the government does not want to take chances with inflation. The allocation will be made to the Food Stabilization Fund, which will be used to rectify any demand and supply imbalances in food. It underlines that food inflation is likely to pose a challenge in this fiscal year and will remain one of the top priority items for the government.

It was an action packed week for the FPI flows, with the budget turning the tide for FPI sentiments. One can expect some rationality to return next week.

DAILY FPI EQUITY FLOWS FOR LAST 4 ROLLING WEEKS

Here is 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 flows
01-Jul-24	1,553.37	1,553.37	186.14	186.14
02-Jul-24	-494.08	1,059.29	-59.24	126.90
03-Jul-24	-2,507.09	-1,447.80	-300.20	-173.30
04-Jul-24	3,898.51	2,450.71	466.70	293.40
05-Jul-24	5,511.54	7,962.25	660.05	953.45
08-Jul-24	3,169.45	11,131.70	379.57	1,333.02
09-Jul-24	161.67	11,293.37	19.37	1,352.39
10-Jul-24	1,528.18	12,821.55	183.05	1,535.44
11-Jul-24	2,183.95	15,005.50	261.58	1,797.02
12-Jul-24	346.92	15,352.42	41.53	1,838.55
15-Jul-24	5,367.76	20,720.18	642.55	2,481.10
16-Jul-24	3,337.89	24,058.07	399.44	2,880.54
17-Jul-24	0.00	24,058.07	0.00	2,880.54
18-Jul-24	1,660.80	25,718.87	198.71	3,079.25
19-Jul-24	5,052.87	30,771.74	604.12	3,683.37
22-Jul-24	1,824.07	32,595.81	218.09	3,901.46
23-Jul-24	8,346.73	40,942.54	997.63	4,899.09
24-Jul-24	-1,548.64	39,393.90	-185.10	4,713.99
25-Jul-24	-3,508.22	35,885.68	-419.13	4,294.86
26-Jul-24	-2,197.79	33,687.89	-262.56	4,032.30

Data Source: NSDL

FPIs were net buyers for the seventh week in a row. With the political uncertainty coming to an end, this week was all about the Union Budget. Here are some key FPI data takeaways.

• In previous 6 rolling weeks, FPIs saw net inflows of $1,845 Million, $885 Million, $953 Million, $1,724 Million, $1,825 Million, and $1,405 Million. In the latest week to July 26, 2024 net FPI equity inflows were $349 Million; infusing $9.04 Billion in last 7 weeks.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI inflows into equities were at ₹33,688 Crore or $4,032 Million. This number turned positive for equities about 5 weeks ago, after a long gap. FPIs net bought debt in this week.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

With the budget gone, the FPIs may spend, at best, one more week in interpreting the fine print of the budget. Meanwhile, the focus of the FPIs is likely to shift to the US rates trajectory and it will await cues in the upcoming Fed policy statement on July 31, 2024. The FPIs will also be close watching the Indian data flows on fiscal deficit and core sector growth next week. The other big trigger will be the overall picture of the Q1 results that is likely to start emerging from the first week of August 2024.