Weekly Musings – FPI flows for week ended March 29, 2024

31 Mar 2024 , 10:07 AM

US DATA LIKELY TO SUPPORT AMBIVALENT FED

In the latest week to March 29, 2024, there were some important data points for the Fed to look at. However, both the data points for the week viz. the GDP growth final estimate for Q4 and the PCE inflation for February 2024 had the impact of making the Fed more ambivalent about the timing of rate cuts. In between, Christopher Waller, in a recent speech, highlighted that the risks of a dovish policy at this juncture outweighed the returns of such a policy. That was hint that a rate cut may not get a ready vote from the FOMC. The other data point was Q4 GDP growth at 3.4%, nearly 20 bps higher than the GDP estimate in the second estimate. Clearly, growth is robust, despite elevated rates and that looks like the new normal, making the Fed all the more ambivalent. How did it impact flows.

To be fair, both these data points came after trading in India had closed for the week. This was already a truncated week with just 3 day of trading but the ambivalence was already expected as GDP was expected to be higher in the US and so was the PCE inflation. The latest week to March 29, 2024 was saw FPIs as net sellers to the tune of $360 Million. In the last 4 weeks, FPIs were net sellers of $314 Million, net buyers of $3,488 Million, net buyers of $919 Million, and net buyers of $743 Million. However, the combined selling of $674 Million in the two recent two weeks can be attributed to more of year-end adjustments and are actually quite paltry if you compare with the $5.56 Billion infusion by FPIs in the 4 weeks prior to that. We should get a clearer picture of FPI action, now that tax farming is over.

CURRENT ACCOUNT DEFICIT UPDATE FOR Q3 IS POSITIVE

During the week, an  important data point was the quarterly update on the current account deficit in absolute terms and also as a percentage of GDP. For Q3FY24, the current account deficit stood at just $10.5 Billion; higher on sequential basis, but sharply lower yoy. If you look at current account deficit on a cumulative basis for the first 9 months of FY24, then it stands at a comfortable level of $31.5 Billion, which is about 1.2% of GDP. However, the big positive is the latest estimates coming from Goldman Sachs, which pegs the full year current account deficit (CAD) at $35 Billion, which could be just under 1% of GDP. This sharp reduction in the CAD as a share of GDP is likely to be driven by a sharp fall in the oil trade deficit as well as a sharp surge in the services trade surplus. The Q3 CAD is well under control despite the merchandise trade deficit recording an all-time high of $31.5 Billion in the month of October 2023.

MACRO FPI FLOW PICTURE UP TO MARCH 29, 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
Total for 2024 (₹ Crore)	(2,906.07)	13,799.72	10,893.65	66,326.04	77,219.69
For 2024 ($ Million)	(334.62)	1,664.04	1,329.42	7,989.82	9,319.24
# – Recent Data is up to March 29, 2024

Data Source: NSDL (Negative figures in brackets)

As of March 29, 2024, the FPIs consolidated their position as net buyers in the year 2024 across equity and debt combined, although they remained net sellers in the first quarter of 2024 in secondary market equities. For calendar 2024 overall, the FPIs were net buyers to the tune of $9,319.24 Million. However, compared to the last week, the equity inflows are substantially lower due to tapering of secondary market flows. For 2024 till date, FPIs net bought equities worth $1,329.42 Million and were net buyers in debt to the tune of $7,989.82 Million. For the first 3 months of 2024, the FPIs were still net sellers in secondary market equities, while the buying in IPOs more than made up for that. On the secondary markets front, FPIs turned net buyers in March, after being net sellers in Jan-24 and Feb-24.

There are 2 things that we can infer from the data. Even as FPI equity flows faltered this week amidst the fiscal year-end volatility, most of the macros remained in place. It was just about the annual adjustment bets that brought down the flows. FPIs net sold $674 Million in equities in the last 2 weeks, and that is not too much if you consider that FPIs were net buyers to the tune of $5.56 Billion in the 4 weeks prior to that. This week may not be representative due to being a truncated week and the pressure of the year ending. The next week should be more representative.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to March 29, 2024, FPIs were net sellers to the tune of $360 Million; while selling $674 Million in the last 2 weeks. This is fairly small compared to the size of inflows in previous week. Here are 6 key data points that influenced FPI flows this week.

• It was a week of heavy data flows. The current account deficit for third quarter was announced at $10.5 Billion or 1.2% of GDP. In addition, the outlook is that FY24 CAD may dip to below 1% of GDP, a situation that was not conceivable about 2 quarters back. That is likely to be positive for the rupee and also to the external ratings of India.
• Core sector growth came in sharply higher at 6.72%. Among the 8 core sectors, only fertilizers showed negative growth with all the other sectors showing positive growth. The oil sector and the infrastructure sector flattered as natural gas output and cement output grew in double digits in the month of February 2024.
• The week also provided the update on the fiscal deficit position as of the end of February 2024. After 11 months, India has consumed 86.5% of the reduced full year fiscal deficit targets. That raises the hope that for the full year, the fiscal deficit should be reined in well within 5.8% of GDP in FY24, paving the way for 5.1% in FY25.
• The US Bureau of Economic Analysis (BEA) released its third and final estimate of fourth quarter GDP at 3.4%, which his nearly 20 bps higher than the second estimate of Q4 GDP. That is a positive sign that the growth continues to be robust. What is more, this boost has come from higher nominal growth in the US economy and not merely by reduced inflation. However, this gives the Fed the reason to go slow on rate cuts.
• PCE inflation for February 2024 was also higher at 2.5%, 10 bps higher than the previous month. The pressure has come entirely from energy inflation because PCE core inflation and PCE food inflation were 10 bps lower in the current month. It was the hardening of the energy inflation that is hitting US inflation and that appears to be a direct outcome of the Red Sea crisis.
• Finaly, let us turn to the two important global macro indicators of crude oil prices and the dollar strength (as evinced by the dollar index). Oil did show signs of tapering after indications that Hamas and Israel could moves towards a cessation of hostilities. However, there has not been much progress on that front. For now, the pressure of the Red Sea crisis on freight rates and insurance premiums continues and that is adding to imported inflation. The dollar index was not as aggressive as last week, but the dollar continues to harden against hard currencies like the Pound, Euro, and the Yen.

The big question still remains on when would the Fed start cutting rates. While the CME Fedwatch is still betting on 3 rate cuts by the Fed in 2024, there are rising concerns that the Fed may not be too keen to cut rats unless inflation and growth sober.

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 (₹ Crore)	Cumulative flows	FPI Flow($ Million)	Cumulative flow
04-Mar-24	2,171.14	2,171.14	261.99	261.99
05-Mar-24	-12.03	2,159.11	-1.45	260.54
06-Mar-24	-221.35	1,937.76	-26.70	233.84
07-Mar-24	5,684.37	7,622.13	685.63	919.47
08-Mar-24	0.00	7,622.13	0.00	919.47
11-Mar-24	10,588.61	18,210.74	1,279.15	2,198.62
12-Mar-24	3,945.51	22,156.25	477.22	2,675.84
13-Mar-24	-115.60	22,040.65	-13.97	2,661.87
14-Mar-24	14,582.35	36,623.00	1,758.97	4,420.84
15-Mar-24	-114.24	36,508.76	-13.79	4,407.05
18-Mar-24	773.09	37,281.85	93.26	4,500.31
19-Mar-24	-1,166.67	36,115.18	-140.71	4,359.60
20-Mar-24	1,351.07	37,466.25	162.90	4,522.50
21-Mar-24	-2,242.76	35,223.49	-269.88	4,252.62
22-Mar-24	-1,326.96	33,896.53	-159.62	4,093.00
25-Mar-24	0.00	33,896.53	0.00	4,093.00
26-Mar-24	-3,871.43	30,025.10	-464.45	3,628.55
27-Mar-24	-3,170.59	26,854.51	-380.37	3,248.18
28-Mar-24	4,042.50	30,897.01	485.14	3,733.32
29-Mar-24	0.00	30,897.01	0.00	3,733.32

Data Source: NSDL

The last 2 weeks saw FPI outflows of $360 Million and $314 Million, after four successive weeks of meaningful positive flows into Indian equities. Here is a quick run-down.

• In last previous 5 rolling weeks, FPIs had seen net outflows of $314 Million, net inflows of $3,488 Million, net inflows of $919 Million, net inflows of $743 Million, and net inflows of $404 Million. The latest week to March 29, 2024 saw net FPI outflows from equities to the tune of $360 Million. The combined outflow of $674 Million in last 2 weeks is marginal, compared to FPI infusion of $5.56 Billion in 4 weeks before that.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI inflows into equities have been decisively positive at ₹30,897 Crore or $3,733 Million. The rolling 4-week flows had turned into positive territory about 4 weeks back, after being in the negative for more than 9 weeks in a row. However, in the current week, the FPI equity outflows were more than compensated by the debt market inflows from FPIs.

In the last few weeks, the focus has oscillated between equity and debt for the FPIs. However, there is a difference. Debt continues to see consistent inflows on the back of its inclusion in the global bond indices of JP Morgan and Bloomberg. However, equity flows would largely depend on how quickly the Fed embarks on rate cuts. On that front, there is a lot of ambiguous thinking.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

There will be 3 key triggers for FPI flows in the coming weeks.

• The coming week will see the FPI flows reacting to the weekend US data like the PCE inflation and the final estimate of Q4 GDP. Both the data points hint at the Fed going slow on rate cut and that is not great news for FPI flows.
• The coming week will see the PMI manufacturing, PMI services and the auto numbers. These are all high frequency indicators and will give a picture of the momentum of India’s economic growth. FPI flows will depend on these numbers.
• But the big factor that will drive the FPI flows next week will be the fresh allocations. With the fiscal year done, there is the big general elections to look forward to. The FPIs are already making their calculations on how to craft their strategy under different scenarios, but the broad bet would still be that the reforms process would progress without any hurdles. We can expect more clarity on allocations in the coming week.

Last week, most FPIs were enthused by the Fed chair almost assuring the markets about 3 rate cuts in 2024. However, the data flow in the latest week has not been too supportive. The latest GDP data and the PCE inflation data indicates that the Fed has reasons to go slow on cutting on rates.