Weekly Musings – FPI flows for week ended July 28, 2023

31 Jul 2023 , 09:41 AM

In a sense, the FPI flows tapered to its slowest pace in the week to July 28, 2023. This was one of the most tepid weeks for FPI flows in the last 3 months, although the FPI flows still stayed in positive territory. At just $191 million, the FPI flows into Indian equities were extremely thin during the week. Even these limited flows were largely driven by IPO flows with secondary markets actually seeing marginal outflows for the week. However, debt flows were positive. There were two reasons for the flows tapering in the week. Firstly, the US Fed decision to hike rates and the chances of Fed rates topping out has made many global investors risk-off in favour of developed markets. Secondly, while median valuations in India are still close to the long term average, global investors have been getting wary at higher levels of the market. That led to tepid flows during the week.

How about a longer perspective?

However, from a slightly longer perspective, July was the third month in which FPIs flattered the street. After infusing $11 billion into Indian equities in the months of May and June 2023, the FPIs have infused another $5.53 billion in the 4 weeks of July with one more trading day left in the month. July 2023 promises to be, at least, as promising as the previous two months and with an inflow of $16.5 billion in 3 months, nearly half of the equity market outflows between October 2021 and June 2022 have been effectively recovered. Also, the net outcome is that, for the calendar year 2023 so far, FPIs have turned net buyers in Indian equities to the tune of $15 billion, of which $13 billion has come through secondary markets and $2 billion has come through IPO markets. It is the latter that is gradually building heft and likely to further scale up in the coming months.

What explains this 3 months of FPI enthusiasm?

There are a mix of fundamental and technical factors that have contributed to a sharp spike in FPI flows. At a secular level, FPIs are still betting on a consumer driven economy that is likely to transition from a $3.5 trillion GDP economy to a $5 trillion economy over the next 5-6 years. That is even assuming very reasonable levels of nominal GDP growth. Secondly, with the Fed almost calling a halt to rate hikes, the undertone appears to be shifting from managing inflation to managing growth. This has helped emerging markets like India in a couple of ways. Firstly, the topping of rates is positive for debt flows as it keeps the yield differential with the developed markets. That is essential to keep the FPIs interested on a risk adjusted basis. Secondly, the lower yields expected are also likely to reduce the cost of funds for equities and boost valuations. Both are favour emerging markets.

Of course, there are also several India-specific factors at work. Macros today have 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 inflation may have been a freak spike due to food prices, but that is coming under control. If inflation is back to a lower trajectory in July, the FPI flows into India should magnify. The critical current account deficit (CAD) is expected to be more benign this year and put less of a pressure on the rupee. As a result, the FPIs are also enthused by the stable rupee as a combination of strong FPI flows and calibrated RBI intervention have provided stability to the USDINR.

Macro FPI flow picture up to July 28, 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 #	37,669.28	7,696.13	45,365.41	1,215.30	46,580.71
Total for 2023 #	1,03,774.74	17,997.24	1,21,771.98	18,157.11	1,39,929.09
# – July Data is up to July 28, 2023

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

We now have FPI flow data for the first 4 weeks of July 2023 (with just one more trading day to go). FPIs are clearly and decisively buyers in equity, although the enthusiasm in the latest week appears to have waned with just about $191 million of inflows. In the last 90 days, the FPIs have infused more than $16.50 billion into Indian equities and nearly $2 billion into Indian debt. FPIs have now infused Rs1.22 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 Rs1.40 trillion. Debt flows continue to be volatile, but the equity story is tilted towards inflows into India. (Live equity action on markets page). Here are the key triggers for robust FPI flows.

• Three major data points from the US are likely to enthuse the FPI flows into India. Firstly, the Fed statement has been viewed positively despite the 25 bps rate hike by the US Fed. That is because the language of the Fed hints that they may be done with rate hikes. Secondly, the first advance estimates for GDP for Q2-2023 has come in higher at 2.4%. This is higher than Q1 and also higher than the street estimates. Thirdly, the PCE inflation (used by the Fed for rate decisions) has fallen in June to 3% with core PCE inflation falling to 4%. All these have indicated lower rates and higher growth, resulting in generally robust flows into emerging markets like India. The good news is that inflation and growth have improved in the US in line with expectations.

   

• Q1FY24 results so far have been better than expected in India. Of course, IT has been a disappointment in terms of guidance but most of the financials have delivered better than expected as have capital goods and infrastructure sectors. That is largely due to the pressure on costs waning and rural sales picking up across the board. Overall, 65% of the results announced till date for Q1FY24 have given results better than street estimates.

   

• One key factor for FPIs is the current account deficit, since it is a measure of the rupee strength and the strength of the sovereign rating. The other key factor is fiscal deficit and the government appears to be making good progress on both fronts. Recent trade data suggests that the overall deficit (combining the merchandise deficit and the services surplus) may stay in the range of $6-$8 billion per month on an average. That is a comfortable scenario and assures that the CAD or the current account deficit will not spill out of control. That should hold ratings and the rupee value in good stead in the coming months. Also, the government is on target to get to its 5.8% fiscal deficit target this fiscal without compromising on capital spending. That is a feel good factor for FPIs.

The year 2023 have started off on a dull note with FPIs heavy sellers in January and February. However, post the GQG Partners infusion of funds into Adani group, the tide appears to have turned in favour of FPI flows. The buy-in from the FPIs since May 2023 has been especially extremely strong.

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
03-Jul-23	11,849.68	11,849.68	1,444.32	1,444.32
04-Jul-23	2,456.38	14,306.06	300.06	1,744.38
05-Jul-23	2,515.33	16,821.39	306.87	2,051.25
06-Jul-23	2,289.64	19,111.03	278.67	2,329.92
07-Jul-23	2,832.79	21,943.82	343.55	2,673.47
10-Jul-23	870.68	22,814.50	105.31	2,778.78
11-Jul-23	1,059.33	23,873.83	128.20	2,906.98
12-Jul-23	1,469.15	25,342.98	178.40	3,085.38
13-Jul-23	-333.60	25,009.38	-40.55	3,044.83
14-Jul-23	5,650.65	30,660.03	688.10	3,732.93
17-Jul-23	3,278.87	33,938.90	399.37	4,132.30
18-Jul-23	504.66	34,443.56	61.43	4,193.73
19-Jul-23	2,527.61	36,971.17	308.06	4,501.79
20-Jul-23	2,193.99	39,165.16	267.23	4,769.02
21-Jul-23	4,638.87	43,804.03	565.41	5,334.43
24-Jul-23	-1,405.07	42,398.96	-171.30	5,163.13
25-Jul-23	230.51	42,629.47	28.14	5,191.27
26-Jul-23	2,854.80	45,484.27	348.96	5,540.23
27-Jul-23	1,130.96	46,615.23	137.94	5,678.17
28-Jul-23	-1,249.82	45,365.41	-152.43	5,525.74

Data Source: NSDL

The week to July 28, 2023 saw FPI flows of just $191.31 million with FPIs net sellers in two out of the five days. 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 $2,673 million, $1,059 million, and $1,602 million. In comparison, the latest week has seen a sharp tapering of FPI inflows to just $191 million.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total FPI flows into Indian equities were Rs45,365 crore or $5.53 billion. The latest week may have been tepid, but FPI sentiments cannot be judged by the performance in just one week.

In the last 20 trading sessions during the recent 4 weeks, FPIs were net buyers on 17 days and marginal net sellers on just 3 days. That shows, which way the FPI winds are blowing.

How will FPIs place their bets at these levels?

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

• With the FOMC July meeting hinting at a peaking of rates, the FPIs would be watching for rate action in the forthcoming September meeting.

   

• Banking, auto and FMCG results have been impressive in Q1FY24. However, FPIs will await more clarity on the outlook for heavyweight IT sector.

   

• FPIs will be watching other major central banks globally like the Bank of England and ECB to get a picture of the risks of monetary divergence for India.

   

• There are the general elections coming up in India next year with a slew of state elections before that. That will be a litmus test for reforms process.

   

• FPIs are keeping an eye on global oil prices. After all, India still relies on imported crude for 85% of its daily requirements.

In recent months, FPIs remained positive on financials, automobiles, FMCG and capital goods, but neutral to negative on IT sector. That is unlikely to change for now.