Weekly Musings – FPI flows for week ended October 06, 2023

9 Oct 2023 , 06:57 AM

FPIs sell equities of nearly $1 billion in October 2023

The first week of October saw fairly intense selling by the FPIs in Indian equities, despite it being a truncated week as the markets functioned for just 4 days. However, the selling intensity of the FPIs appeared to extend the trend of September. In the first 1 week of October, the FPIs were net sellers to the tune of $962 million. That is nearly $1 billion of FPI selling in equities in just a week, and this comes on top of $1.78 billion of FPI selling in the month of September. Now, this FPI selling almost looks like a reversal of trend of the past few months. Sample these numbers! Between March 2023 and August 2023, the FPIs had infused $20.62 billion into Indian equities of  which $18.23 billion was infused in just the 4 months between May and August 2023. However, the 6-month FPI buying trend was broker in the month of September 2023 with FPIs net sellers to the tune of $1.78 billion. That may look small in comparison, but the trend shift is what the markets would worry about.

As of the close of the first half of FY24 in September, FPIs had already infused $14.67 billion into Indian equities on a net basis. In addition, they had also infused a net amount of $2.88 billion into debt. To an extent, the FPI buying in debt in the current fiscal was largely triggered by the narrowing of yield differentials between the US and India as well as the inclusion of Indian debt paper into the JP Morgan Global Emerging Markets Bond Index. The latter is likely to infuse nearly $35-40 billion of inflows into Indian bonds as part of passive fund and passive ETF adjustments by mid-2024. With 3 months to go in the current calendar year and 6 months to go for the current fiscal, it remains to be seen if the FPIs can retain the buying momentum or they veer towards the sell-side. After all, India still has the advantage of being the fastest growing large economy in the world, with inflation well in check.

What triggered FPI selling in the week to October 06, 2023

If the FPI selling of $1.78 billion in September was a departure from the trend of the last 6 months, the first week of October 2023 has already seen FPI selling of close to $1 billion in the first week itself. In the latest trading week, the PFIs were net sellers on all the days. In addition, if you look at the last 4 weeks, then the FPIs were net sellers on 12 out of the 17 trading days. In the last 4 rolling weeks, the FPIs have been net sellers of $2.23 billion, which shows the selling concentration. It remains to be seen if the traditional October buying from FPIs emerges in the remaining weeks of the month. Here is a sneak peak at the key factors that triggered FPI selling in the latest week to October 06, 2023.

• One of the factors that the FPIs are worried about the Indian markets is the up coming quarterly results for Q2FY24. While pressure on IT stocks is already taken for granted, the concern is that even industrials could see the impact of inflation creeping up in the latest quarter. The advantage off falling input costs that had benefited Indian companies in the last 4 quarters, appears to be waning; and this quarter could see a reversal.

   

• Fed hawkishness continues to be the big risk for the global markets and emerging markets like India are the most vulnerable. While the Fed minutes will be keenly watched this week, the Fed policy statement in September has already made it clear that rates will stay high for longer. It will be a prolonged pause. That has impacted the market sentiments globally and India has been no exception. Clearly, inflation is acting stickier than expected an that is not good news for FPI flows.

   

• The outcome of sustained Fed hawkishness has been that US bond yields and US dollar index have both spiked sharply in the last 2-3 weeks. The US bond yields are already at a 17-year high. The US dollar index went above 107 for only the third time in the last 40 years. While the latest week saw the dollar index (DXY) retreating, the dollar is likely to continue to strengthen, as long as the Fed remains hawkish on the rates front. That has had a rather immediate and intense impact on the Indian markets and FPI flows.

   

• Macro risks are never too far off for Indian markets. In the last couple of weeks, the big macro risk was the likely shutdown of the US government due to delay in passing the expenditure bills. That has been resolved, at least for the next 45 days, but a new risk has emerged. During the week, the Hamas bombed Israel and there was a strong retaliation. This is clearly going to be a long-drawn affair and it again brings uncertainty to the Middle East and West Asia region; one of the major producers and exports of oil. 

   

• Indian growth numbers in terms of GDP and core sector growth have been fairly impressive in the recent months. However, that does not mask the reality that inflation continues to be a pressure point. While core inflation has trended lower; food inflation still remains well above the what it was 3 months back and fuel inflation has been kept in check in India only through artificial pricing mechanisms. While the current account deficit (CAD) tapered to just 1.1% of GDP, global brokers like UBS have underlined the risk that the CAD for FY24 could touch 1.7% to 1.8% of GDP. That has also made the FPIs relatively cautious on Indian equities.

The signals of a slowdown in FPI flows were visible from August itself. August 2023 saw FPI inflows falling to a third of the average of May, June, and July. If September saw FPI outflows of $1.78 billion, October has seen FPI selling of nearly $1 billion in the first week itself. What happens to FPI flows in the remaining weeks of October could set the tone for the colour of FPI flows in the year 2023. 

Macro FPI flow picture up to October 06, 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	37,292.82	9,324.94	46,617.76	1,359.32	47,977.08
Aug-2023	9,232.57	3,029.71	12,262.28	6,075.54	18,337.82
Sep-2023	(14,576.40)	(191.10)	(14,767.50)	957.11	(13,810.39)
Oct-2023 #	(9,874.91)	1,876.93	(7,997.98)	1,974.27	(6,023.71)
Total for 2023	88,179.54	24,341.59	1,12,521.13	27,308.05	1,39,829.18
# – October Data is up to 06th October 2023

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

While September 2023 may have been a disappointing month for FPI flows, October has seen the FPI selling intensifying. However, the good news is that the macro picture is still relatively intact. The longer term FPI flows provide a better perspective of which way the FPI winds are flowing in the current calendar year. As of August, the overall inflows into equities in 2023 had already offset the outflows in 2022. That advantage has reduced in the last 45 days with nearly $3 billion of FPI selling. It is still close as the year 2023 has seen equity market inflows of Rs1.13 trillion compared to outflows of Rs1.21 trillion in 2023. The good news is that IPOs have contributed nearly 3 billion in terms of FPI flows in 2023 and that is just starting to pick up. Also, FPIs would not want to be away for too long from an economy that is poised to grow from $3.5 million to $5 million over the next 4-5 years.

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 for 4 weeks to October 06, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
11-Sep-23	-97.07	-97.07	-11.68	-11.68
12-Sep-23	1,466.70	1,369.63	176.96	165.28
13-Sep-23	-330.83	1,038.80	-39.87	125.41
14-Sep-23	-2,293.06	-1,254.26	-276.43	-151.02
15-Sep-23	688.78	-565.48	83.01	-68.01
18-Sep-23	300.84	-264.64	36.22	-31.79
19-Sep-23	0.00	-264.64	0.00	-31.79
20-Sep-23	-745.58	-1,010.22	-89.60	-121.39
21-Sep-23	-3,075.88	-4,086.10	-369.45	-490.84
22-Sep-23	-1,875.38	-5,961.48	-225.54	-716.38
25-Sep-23	-1,165.26	-7,126.74	-140.48	-856.86
26-Sep-23	-1,386.62	-8,513.36	-166.86	-1,023.72
27-Sep-23	137.82	-8,375.54	16.56	-1,007.16
28-Sep-23	-2,189.32	-10,564.86	-263.08	-1,270.24
29-Sep-23	0.00	-10,564.86	0.00	-1,270.24
02-Oct-23	0.00	-10,564.86	0.00	-1,270.24
03-Oct-23	-1,951.45	-12,516.31	-345.27	-1,615.51
04-Oct-23	-836.06	-13,352.37	-100.51	-1,716.02
05-Oct-23	-3,956.74	-17,309.11	-475.23	-2,191.25
06-Oct-23	-337.42	-17,646.53	-40.54	-2,231.79

Data Source: NSDL

The week to October 06, 2023 saw one of the sharpest bouts of FPI selling on the back of rising macro risks in the short term.

• In the previous 4 rolling weeks, FPI witnessed outflows at $(554) million, $(648) million, $(68) million, and $(658) million. The latest week saw net FPI outflows of $(962) million; making it the fifth successive week of FPI outflows in a row.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from Indian equities were to the tune of Rs17,647 crore or $2.23 billion. This is the fourth time in the last 5 months that the rolling 4-week FPI flows have been negative. FPI selling pressure is clearly adding up in recent months.

What will drive FPI flows in the coming weeks?

There will be 3 key drivers of FPI flows in the coming week to October 13, 2023.

• The US FOMC minutes will be published this week and that will give the first picture into what the members of the FOMC discussed. The bias towards prolonged pause, but the discussions minutes would give more clarity.

   

• FPIs are likely to be watching the US inflation number and the India inflation number closely. Both are expected to taper, but that would largely determine the rate differentials and the potential direction of FPI flows.

   

• FPIs will also be tracking the crude oil prices and the USDINR equation. As a proxy, the FPIs would be tracking the US 10-year bond yields and the US Dollar Index (DXY); and both are at multi-month highs. Both have deep implications for FPI flows in the short to medium term.

The good news is that the diplomatic standoff with Canada and the US shutdown are not major risks anymore. However, the situation in the Middle East is once again volatile. Hopefully, the macros should be more favorable for Indian economy this week.