Weekly Musings – FPI flows for week ended May 17, 2024

20 May 2024 , 09:42 AM

WHAT TRIGGERED THE RALLY IN THE MARKET?

It has often been said that FPI flows are a major swing factor in deciding the direction of the markets. However, that was not exactly the case with the markets in the week to May 17, 2024. For instance, the FPIs were net sellers in the week to the tune of $1,336 Million. However, the Sensex closed the week with gains of 1.85% while the Nifty closed with gains of 2.03%. However, the real action was not in the large cap indices but the smaller indices. The Nifty Next 50, Mid-Cap 100 and the Small Cap 100 rallied anywhere between 4.8% and 5.8% during the week, clearly showing a lot of traction in the smaller stocks. What were the major triggers that led to a return of buying interest in the smaller stocks this week?

Remember, this was a 6-day week with markets trading briefly in live session on Saturday also. Despite a longer week, the markets closed comfortably in the positive. One view is that short covering would have taken the markets higher. However, that may only be partially true since shorts would not want to cover when the VIX is as high as 20 levels. The other view is that the US economy was showing signs of picking up and that had triggered a lot of buying interest in Indian stocks on rate cut hopes. However, what could also be an explanation is that several stocks are likely to see upgrades to MSCI weights so there is a lot of global money waiting to come in. Also, the election outcome date is approaching and the markets are again veering around to the view that for the markets it would be business as usual. But we have to await the election outcome on June 04, 2024, for a clear picture.

COULD THE ELECTIONS TRIGGER A MARKET SHOCK?

That is normally a hard call to make, but we can broadly consider three possibilities here. We do not have too much of ground intelligence, so we will just try to extrapolate the 2019 outcome and adjust for the shift. The first possibility is that the NDA may return to power with a similar majority or a slightly lower majority. As per the last opinion poll, that did look like the most likely scenario. The second possibility is that the INDIA grouping may do much better than expected. The NDA would still get a majority, but it would not be as absolute as the last two elections. The third possibility is that the INDIA combination may get the requisite numbers and spring a surprise in the markets. Logically, that does look like a remote possibility at this juncture, but elections can be notoriously unpredictable in India, so that is a plausible scenario. The good news is that, whatever be the outcome of the elections or the combination that evolves at the centre, the pace and momentum of reforms is unlikely to falter. That is good news for markets. In the midst of complex political equations, an economic status quo itself is like a blessing in disguise.

MACRO FPI FLOW PICTURE UP TO MAY 17, 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) #	(30,136.24)	1,894.61	(28,241.63)	1,159.69	(27,081.94)
Total for 2024 (₹ Crore)	(56,373.35)	30,354.10	(26,019.25)	59,896.98	33,877.73
For 2024 ($ Million)	(6,739.35)	3,650.12	(3,089.23)	7,220.27	4,131.04
# – Recent Data is up to May 17, 2024

Data Source: NSDL (Negative figures in brackets)

FPIs were net sellers for the fifth week in a row, and the tempo of selling continued in the current week also. If you look back, the week to May 10, 2024 saw net FPI selling of $2.18 Billion, while the latest week to May 17, 2024 has seen FPI selling to the tune of $1.34 Billion. In the last 5 weeks, FPIs have sold close to $6 Billion in Indian equities. In the latest week, the numbers could have been a lot more negative, but for the IPO inflows.

The week to May 17, 2024 saw FPIs net sellers in equity secondary markets but were marginal net buyers debt markets. For calendar 2024 overall, FPIs were net buyers to the tune of $4,131.04 Million. For 2024 till date, FPIs net sold equities worth $(3,089.23) Million and were net buyers in debt to the tune of $7,220.27 Million. As of the close of May 17, 2024, the FPIs were still net sellers in secondary market equities worth $(6,739.35) Million, while the buying in IPOs partially compensated for that at $3,650.12 Million.

This is the fifth consecutive week that FPI flows are under pressure. The FPI selling of $1.34 Billion in the latest week to May 17, 2024 comes on top of $2.18 Billion of net FPI selling in the previous week. The political uncertainty and the elevated levels of the VIX have been key factors in the heavy FPI selling. Now FPIs are net sellers overall in the months of April 2024 and May 2024. However, year to date, the FPI flows are still positive.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to May 17, 2024, FPIs were net sellers to the tune of $1,336 Million; marking the fifth consecutive week of FPI selling. In this period, FPIs have sold equities more than $6 Billion in Indian markets.

• Political uncertainty continued to dominate the FPI debate in the week. While the election outcome is expected on June 04, 2024, most of the FPIs are also pencilling in what would be their strategy if there were some unexpected changes in India at a political level. One thing that has rattled the markets is that the election pitch has suddenly become strident and that is not something the markets are used to. However, we have to await the first exit polls that are likely to be out after the last round of elections are completed later this month.
• The VIX was the other big story of the week. Through the week, the volatility index (VIX) has stayed persistently above the 20 mark. What is surprising is that this elevated VIX has been despite the sharp rally in the markets. There are two opinions emerging in the market. One view is that the rise in VIX is a sign of caution building up in the markets as there is a rush to buy hedges. The other counter-intuitive explanation is that since most of the institutions and proprietary desks are on the sell side of options. This could also be a signal of the markets bottoming out. We have to see how VIX evolves this week.
• India CPI inflation came in marginally lower at 4.83%. However, what would really worry the markets is that the food inflation spiked by 18 bps over the last month. Most of the pressure is coming from cereals, pulses, and vegetables. Core inflation and fuel inflation appear to be under control, but it remains to be seen what happens once the oil prices are freed up post the elections. Like in the US, the Indian policymakers are also discovering that the last mile inflation control is proving harder than expected.
• US consumer inflation that was announced in the week was lower on a yoy basis and also on a MOM basis. The YOY inflation fell from 3.5% to 3.4% while the MOM inflation fell from 0.4% to 0.3%. However, this comes on the back of a sharp rally. Also, the US inflation currently is around 140 bps away from the 2% target, so it is still unclear how the CME Fedwatch expects the Fed to implement the first rate cut in September. That does look like a tough task at this juncture.
• Indian trade data was not too flattering for the month of April 2024. While the merchandise imports grew by 10.25%, the merchandise exports grew by just 1.09%. The impact of the Red Sea crisis appears to have rubbed off on Indian exports. For FY25, the current account deficit (CAD) is now being projected at 1.25%, which is likely to be higher than the FY24 figure, which would be closer to 1%. The CAD data for FY24 will be announced towards the end of June 2024.
• In a rather surprising move, SBI has taken the lead in hiking deposit rates between 25 bps and 75 bps. The idea is that Indian deposit rates are too low and have not risen compared to the lending rates. That has created an anomalous situation where credit growth is surging but deposit growth is struggling. To bridge this gap, Indian banks need to offer higher rates on deposits. The big question was who will take the initiative to bell the cat. In this case, SBI has taken the lead and considering its size and influence, the other banks are likely to follow suit. It also implies that the pressure on bank net interest income (NII) growth and on the net interest margins (NIMs) is likely to intensify in the coming quarters. That is not great news for the banking stocks.

With the Q4 results season done, the action shifts largely to the political front. However, the FPIs will be taking a long hard look at the VIX for now.

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 flow
22-Apr-24	772.77	772.77	92.52	92.52
23-Apr-24	-2,619.00	-1,846.23	-313.98	-221.46
24-Apr-24	-3,458.12	-5,304.35	-414.76	-636.22
25-Apr-24	4,227.19	-1,077.16	507.47	-128.75
26-Apr-24	26.94	-1,050.22	3.24	-125.51
29-Apr-24	-2,372.84	-3,423.06	-284.72	-410.23
30-Apr-24	5.53	-3,417.53	0.66	-409.57
01-May-24	0.00	-3,417.53	0.00	-409.57
02-May-24	1,851.02	-1,566.51	221.63	-187.94
03-May-24	-695.00	-2,261.51	-83.28	-271.22
06-May-24	-2,138.05	-4,399.56	-256.42	-527.64
07-May-24	-1,150.98	-5,550.54	-137.89	-665.53
08-May-24	-2,942.98	-8,493.52	-352.45	-1,017.98
09-May-24	-5,336.80	-13,830.32	-639.03	-1,657.01
10-May-24	-6,669.92	-20,500.24	-798.81	-2,455.82
13-May-24	-1,292.15	-21,792.39	-154.76	-2,610.58
14-May-24	-4,392.53	-26,184.92	-525.90	-3,136.48
15-May-24	-2,513.07	-28,697.99	-300.89	-3,437.37
16-May-24	-2,338.84	-31,036.83	-280.07	-3,717.44
17-May-24	-622.33	-31,659.16	-74.52	-3,791.96

Data Source: NSDL

FPIs have now been net sellers for 5 weeks in a row. On an aggregate basis, the FPIs have sold Indian equities to the tune of around $6 Billion in the last 5 weeks. Political uncertainty and elevated VIX is playing truant.

• In previous 5 rolling weeks, FPIs had seen net outflows of $2,184 Million, $146 Million, $126 Million, $2,229 Million, and net inflows of $1,641 Million. The latest week to May 17, 2024 saw net FPI outflows of $1,336 Million from equities.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from equities were at ₹(31,659) Crore or ($3,792) Million. This number has stayed in the negative zone for several weeks. The week saw marginal net buying by FPIs in debt.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

There are some key triggers for FPI flows in the coming weeks to watch out for. With most of the data flows done in India, the next big thing would be the Q4-GDP and the FY24 GDP number from MOSPI. At a global level, the markets will be watching the US GDP growth Q1 second estimate and the PCE inflation for April 2024. India CAD towards the end of June 2024 will be another key data point. Till June 04, 2024; political uncertainty will be the big overhang for the FPI flows, till there is clarity on the political combination at the centre. The state of flux in the markets is best illustrated by the surge in VIX, which has remained sticky above 20 for over 2 weeks now. Hopefully, that should also taper once the political landscape becomes clearer!