Weekly Musings – FPI flows for week ended October 04, 2024

7 Oct 2024 , 04:22 AM

GEOPOLITICAL RISK SPOOKS FPI FLOWS THIS WEEK

It was a week in which several important data points were put out. The India core sector data disappointed as did the slightly higher current account deficit. The India fiscal deficit story was solid with just 27% of the full year deficit covered till the end of August 2024. Even the US unemployment rate of 4.1% was lower than the previous two months, and the non-farm payrolls also increased sharply. But the real risk was in the geopolitics. On October 01, 2024, Iran launched a series of rocket attacks on Israel in response to the targeted killings of key Hezbollah and Hamas leaders by Isreal. Both these extremist organizations are backed by Iran. The US has been a silent spectator to the war, with its support naturally inclined towards its long-time ally, Israel. However, with US elections coming up, they are neutral.

However, there are larger concerns for the global markets and that is what spooked the markets and also led to a deluge of outflows from India. Firstly, the markets were worried that a prolonged war between Israel and Iran would result in Israel attacking some of the key oil installations of the NOIC. That is likely to hit global supply hard and spike oil prices. That was evident this week with Brent Cruder rallying from $71/bbl to $78/bbl in the week. Secondly, there are concerns that, if pushed to a corner, Iran may be forced to announced a blockade of the Straits of Hormuz. That may be a controversial move, but would still impact the flow of oil and other commodities to Asia; with Hormuz being the gateway to Asia.

There are also other risk at a geopolitical level. For now, the Middle Eastern powers like Saudi Arabia and UAE have been in the sidelines. However, in a prolonged war, it is very likely that most of the Arab world as well as Egypt and Turkey may lean against Israel. There is the additional possibility that Iran would also look to use the strategic positioning of the Houthi Rebels in Yemen to disrupt trade traffic through the Red Sea and the Suez Canal. All this would really mean pressure on oil prices, and a sustained weakening of the Indian rupee. These concerns were visible in the way the markets tanked in the week by nearly 4.5% and FPIs sold off heavily in the week. It was largely the story of worsening geopolitics.

FPI FLOWS WERE MUGGED BY REALITY DURING THE WEEK

The pressure of FPI flows is evident if you look at the numbers in the latest week. FPIs were net sellers for the week to the tune of $(3.12) Billion, despite this being a truncated week and FPIs being net buyers on Monday. If you just look at the first 3 trading sessions of October, then FPI have been net sellers to the tune of $(3.24) Billion, averaging more than $1 Billion of FPI outflows per day in October. This heavy FPI sell-off in India equities came after 6 consecutive weeks of FPI inflows into Indian equities.

In the previous 5 weeks, the FPIs had infused $2.83 Billion, $696 Million, $2.01 Billion, $1.31 Billion, and $2.82 Billion respectively; taking the total infusion in the last 5 weeks to a whopping $9.70 Billion. In comparison, the selling in the latest week to the tune of $(3.12) Billion does not look too large. However, it is not yet clear if this week was a one-off selling by FPIs or the trend is likely to continue for some more time. Remember, even the likes of Chris Wood have said that Indian markets were not pricing in geopolitical risks fully.

MACRO FPI FLOW PICTURE UP TO OCTOBER 04, 2024

The table captures monthly FPI flows into equity and debt for the last 3 calendar year viz., 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)	26,059.05	6,305.79	32,364.84	16,431.20	48,796.04
Aug-2024 (₹ Crore)	(5,552.01)	12,872.13	7,320.12	18,173.17	25,493.29
Sep-2024 (₹ Crore)	46,552.40	11,171.24	57,723.64	35,813.99	93,537.63
Oct-2024 (₹ Crore) #	(30,555.93)	3,413.76	(27,142.17)	4,040.75	(23,101.42)
Total for 2024 (₹ Crore)	3,998.08	69,468.94	73,467.02	1,61,064.77	2,34,531.79
For 2024 ($ Million)	497.22	8,231.46	8,818.68	19,310.23	28,128.91
# – Recent Data is up to October 04, 2024

Data Source: NSDL (Negative figures in brackets)

If you compare 2024 with the calendar year 2023, then the results are quite flattering on an overall basis. For instance, the calendar year 2023 saw net FPI inflows of ₹2.37 Trillion, while the inflows in calendar 2024 are already at ₹2.35 Trillion in the first 9 months of the year. However, the break-up also tells the story of how debt has dominated in the year 2024. If you look at the net flows into equity; it stood at ₹1.71 Trillion in the year 2023, but has fallen to ₹0.73 Trillion in the first 9 months of 2024. While FPI flows into IPO are better in 2024 than in 2023, it is in secondary market equity flows that 2024 is falling grossly short of 2023. Let us also look at the picture of debt flows. In 2023, the net inflows from FPIs into debt was to the tune of ₹0.66 Trillion, while in the first 9 months of 2024, the inflows are already more than double at ₹1.61 Trillion. In short if net equity flows were 72.2% of total FPI flows in the year 2023, the ratio falls to just 31.3% in the first 9 months of 2024. Clearly, the combination of index inclusion and FAR bonds have given a big boost to FPI debt flows; and that, in a sense, has saved the blushes for India with respect to FPI flows.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to October 04, 2024, FPIs decisively turned net sellers to the tune of $(3.12) Billion. From a broader perspective, FPIs are still net buyers in the last 6 weeks, but it remains to be seen if geopolitical risk continues to haunt FPI flows in the coming months. Here is what drove FPI sentiments in the week.

• The week was dominated by geopolitics after Iran launched all-out attacks on Israel. This was a response to the targeted killings of Hamas and Hezbollah leaders by Israel. For now, Israel has not retaliated, but for now both countries would want to avoid an all-out war. They would be prefer to trade occasional missiles as an all-out war would result in too much of global resentment. However, the Middle East and West Asia remains a tinderbox and could become a geopolitical nightmare at short notice.
• The direct impact of the geopolitical risk was visible in the price of crude oil. Brent Crude rallied from $71/bbl to $78/bbl during the week. The frenetic rally was led by concerns that Israel could strike some of the key oil installations of the NOIC and also that Iran could retaliate by blockading the Straits of Hormuz, the key gateway for the movement of oil to Asia. For now, the risks are more on paper, but oil traders are not taking any chances.
• US unemployment data came in much better than expected and it has now fallen from 4.3% in July to 4.2% in August and further to 4.1% in September. The data gives confidence to the US Fed that hard landing may not be a real concern at this point of time and will also allow the Fed to proceed with its plan to cut another 50 bps by end of 2024 and an additional 100 bps by the end of 2025, taking the total quantum of rate cuts to 200 basis points by the end of 2025. More importantly, the non-farm payroll additions more than doubled in September over August.
• India Core sector growth contracted by -1.8% for August 2024. This is the first core sector contraction in 42 months. If you exclude the COVID pandemic period, this is actually the first contraction in core sector since April 2015. What is concerning the markets, and even the government, is whether this contraction in core sector is a direct outcome of the government cutting down its capex growth for FY25 from 30% in the last two fiscal years to just 11.1%. Other than steel and fertilizers, the other 6 crore sector baskets saw negative growth in the month of August.
• The India current account deficit for the first quarter of FY25 came in at $9.7 Billion or 1.1% of GDP. This is wider than the 1% CAD reported in the year ago period and sharply wider compared to the current account of surplus of 0.5% of GDP reported in the fourth quarter of FY24. For now, this raises concerns that the full year CAD could get closer to the 2% mark, something that is likely to be negative for the Indian rupee and also put some of the rating parameters of the Indian economy at risk. In the latest quarter, the widening merchandise trade deficit has been an area of concern and that does not seem to be showing any signs of abating.
• The Controller General of Accounts also announced the update of fiscal deficit for the month of August 2024. With 5 months of FY24 gone, the fiscal deficit is just 27% of the full year fiscal deficit target of ₹16.13 Trillion. That means, it is very likely that the fiscal deficit for FY25 may be contained even under the budgeted 4.9% of GDP. One can argue that this is more due to the bumper RBI dividend payout of ₹2.11 Trillion, which has already been accounted for in the month of May 2024. But the real risks are two-fold. Firstly, once the RBI dividend effect tapers, the fiscal deficit as a share of full year target is likely to escalate much faster. Secondly, the government is in a dilemma about the impact of slowing capex leading to core sector contraction. Whether is spurs the government to boost capex, even at the cost of higher fiscal deficit, remains to be seen.
• For the week to October 04, 2024; the Indian rupee closed beyond the ₹84/$ mark. For the last few weeks, the RBI has been persistently selling dollars at around ₹84/$ to stem a sharp fall in the rupee. However, this week saw the rupee hit by a spike in crude oil prices. Also, the geopolitical risks were forcing a lot of safe haven buying in dollar assets, which has triggered strength in the dollars, leading to pressure on most emerging currencies. It remains to be seen how long the RBI can defend the rupee near the ₹84/$ levels, but one must not forget that the Indian government has a forex war chest of $700 Billion, next only to China, Japan, and Switzerland in the world.

The next big trigger for the markets will be coming from the second quarter company results and inflation numbers and the Kharif data for the year. But, the big X-factor for markets in the short to medium term remains the geopolitical risk.

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
09-Sep-24	1,942.90	1,942.90	231.49	231.49
10-Sep-24	1,134.37	3,077.27	135.14	366.63
11-Sep-24	2,962.44	6,039.71	352.78	719.41
12-Sep-24	2,869.62	8,909.33	341.82	1,061.23
13-Sep-24	7,971.70	16,881.03	949.19	2,010.42
16-Sep-24	0.00	16,881.03	0.00	2,010.42
17-Sep-24	3,045.76	19,926.79	363.04	2,373.46
18-Sep-24	0.00	19,926.79	0.00	2,373.46
19-Sep-24	2,380.95	22,307.74	284.03	2,657.49
20-Sep-24	410.53	22,718.27	49.09	2,706.58
23-Sep-24	15,181.36	37,899.63	1,818.30	4,524.88
24-Sep-24	2,031.72	39,931.35	243.29	4,768.17
25-Sep-24	-1,454.09	38,477.26	-173.86	4,594.31
26-Sep-24	-636.66	37,840.60	-76.20	4,518.11
27-Sep-24	8,537.58	46,378.18	1,020.01	5,538.12
30-Sep-24	936.50	47,314.68	111.93	5,650.05
01-Oct-24	-6,426.84	40,887.84	-767.03	4,883.02
02-Oct-24	0.00	40,887.84	0.00	4,883.02
03-Oct-24	-5,208.58	35,679.26	-621.44	4,261.58
04-Oct-24	-15,506.75	20,172.51	-1,847.15	2,414.43

Data Source: NSDL

FPIs Turned net sellers after 6 consecutive weeks of net buying in Indian equities. The latest week saw FPIs net selling Indian equities to the tune of $(3.12) Billion. In the previous 6 weeks, the FPIs had infused $9.7 billion into Indian equities, so the latest week’s selloff should not be too disconcerting. Here are key FPI data takeaways.

• In previous 7 rolling weeks, FPIs saw net inflow of $2,832 Million, $696 Million, $2,010 Million, $1,309 Million, $2,816 Million, $584 Million; and net outflows of $(926) Million. In the latest week to October 04, 2024 net FPI equity outflows were to the tune of $(3,124) Million; which is one of the sharpest week of selling in recent memory.
• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI inflows into equities were to the tune ₹20,173 Crore or $2,414 Million; largely spoilt by the sell-off this week. In the recent week, the selling was rampant in all 3 days of October 2024.

Rising geopolitical risk remains a big overhang on markets.

TRIGGERS FOR FPI FLOWS IN COMING WEEKS?

There are a number of big triggers for FPI flows in the coming week. Here is a quick dekko at some of the key triggers.

• Q2FY25 company results will be the key data input for FPIs this week, as they expect some pressure of higher input costs and higher cost of funding.
• RBI Monetary Policy Statement will be issued on October 09, 2024; which will set the tone for the RBI reaction to Fed rate cuts.
• FOMC minutes will also be announced during the week and the markets will be keen to see the fine print of the debates of members on rates.
• But, the real story to watch out for is the global geopolitical situation and FPI flows will remain cautious as long as the oil risks continue to remain elevated.

As of now, it is not clear if the sell-off in this week is a flash in the pan or indicative of a bigger shift in the underlying trend. That will hold the key to FPI flows!