Weekly Musings – FPI flows for week ended October 13, 2023

15 Oct 2023 , 10:37 AM

FPIs sell equities; but IPOs and debt inflows make it up in October

The first week of October 2023 had seen intense selling to the tune of nearly $1 billion by the foreign portfolio investors (FPIs), despite being a truncated week. In the first week of October 2023, the FPIs were net sellers to the tune of $962 million. This came on top of $1.78 billion of FPI selling in the month of September 2023. The selling in September and the first week of October was disconcerting as it marked a reversal of a positive trend. Between March 2023 and August 2023, FPIs had infused $20.62 billion into Indian equities of  which $18.23 billion was infused in 4 months between May and August 2023. This 6-month FPI buying trend was broken in September and October continued to perpetuate that trend. However, the second week of October brought in an entirely different perspective to FPI flows. Here is how.

As of the close of the close of the second week of October 2023, the FPI numbers threw up a very interesting situation. FPIs have been net sellers in secondary market equities to the tune of Rs13,653 crore in the first two weeks of October, which is close to the selling we saw in the whole of October in the secondary markets. However, there have been two redeeming features in the latest week. For instance, the Rs13,653 crore of net selling in secondary market equities was largely offset by inflows to the tune of Rs3,869 crore from IPOs and an inflows of Rs3,917 from equity and debt. If you look at the overall flows of FPIs in October as of the close of the second week, the net outflows are at about Rs5,867 crore. That is hardly worrisome if looked at overall. In short, the prospects of India’s inclusion in the JP Morgan Global Emerging Markets Bond Index resulted in interest in India debt, while a slew of interesting IPOs have caused a shift of FPI interest to the primary markets. India has the advantage of being the fastest growing large economy in the world, with inflation well in check. That means; FPI interest in India in some form still continues.

What triggered FPI selling in the week to October 13, 2023

To be fair, if FPIs sold $962 million in Indian equities in the first week of October, then the net selling in equities was to the tune of just about $215 million in the second week. This is largely, thanks to the IPO inflows from FPIs and that is likely to grow as more mainboard companies announce mega IPO plans. Here is a sneak peak at the key factors that triggered FPI action in the latest week to October 13, 2023.

• One of the factors that FPIs have been tracking closely in the Indian markets is the quarterly results for Q2FY24 and the week saw some bit IT sectors results of companies like TCS, Infosys and HCL Technologies. The pressure on top line growth in constant currency was visible and while TCS does not give guidance, Infosys an HCL Tech have been cautious. The good news is that the operating margins continue to remain robust due to checks on manpower costs. A clearer picture will emerge as the industrials start to announce Q2FY24 result in the next couple of weeks.

   

• The big news flows in the latest week from the US pertained to the inflation number and the Fed minutes. The Fed minutes made it clear that while inflation was still a challenge, the Fed would possibly restrict itself to just one more rate hike of 25 bps. However, the focus will be on pausing for a longer period. The bad news is that hawkishness is not going away easily. The good news, however, is that its translation in higher rates is going to be limited from here on. The Fed was broadly ratified by inflation for September in the US flat at 3.70%, the same level as August 2023.

   

• The twin indicators of the US dollar index and the US Bond yields continued to be the key driving factors. For instance, there was some respite in the bond yields as it tapered from 4.81% to 4.63% during the week after it appeared that the Fed would limit itself to just one more rate hike. At the same time, the dollar index (DXY) spiked during the week from 106.24 to 106.67. While the bond yields may be capped, the dollar is likely to remain strong as long as the Fed is pausing on rates; even if not hiking it.

   

• Geopolitical risks came back to haunt in a big way during the week. The situation in the Middle East and West Asia became more volatile as Israel launched unprecedented attacks on the Hamas and on Palestine in response to civilian killings. It looks like a long drawn war with more countries like Iran and Saudi Arabia likely to be slowly dragged into the fray. In addition, the recent sanctions imposed by the US on tankers transporting Russian crude above the ceiling price of $60/bbl is likely to make matters worse. FPIs are likely to wary amidst these rising geopolitical tensions, especially due to its implications for India’s oil bill. 

   

• On the other hand, it was a positive week in terms of India-specific data. CPI inflation for September 2023 came in sharply lower at 5.02%, a fall of 181 bps over August and a fall of 242 bps over July. That leaves India inflation just 102 bps short of the RBI long term target of 4% inflation. The index of industrial production (IIP) for August 2023 came in at a 14-month high of 10.3%, led by manufacturing and ably supported by mining and electricity. But the biggest boost can from a sharp reduction in the merchandise trade deficit for September and the overall trade deficit (merchandise deficit plus services surplus) falling below $5 billion. That bodes well for the current account deficit (CAD).

The signals of a slowdown in FPI flows were visible from August and September only reinforced the trend. October started on a negative note, but the second week has seen robust flows from IPOs and from debt. Clearly, FPIs are allocating their assets and that is not a bad thing after all.

Macro FPI flow picture up to October 13, 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 #	(13,652.61)	3,868.57	(9,784.04)	3,917.15	(5,866.89)
Total for 2023	84,401.84	26,333.23	1,10,735.07	29,250.93	1,39,986.00
# – October Data is up to 13th October 2023

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

September 2023 was a disappointing month for FPI flows after the deluge of inflows in the previous 6 months. October has only accentuated that trend. However, one must not miss the deeper narrative in the FPI flows in October. While FPIs outflows in October 2023 from secondary markets was to the tune of Rs13,653 crore, there strong inflows from IPOs and also from debt. The net result is that outflows in October till date, on an overall basis is just about Rs5,867 crore. 

The picture becomes a lot clearer when you look at the picture for 2023 as a whole. For the year to date, secondary market inflows were at Rs84,402 crore, supported by Rs26,333 crore from IPOs and Rs29,251 crore into debt. In short, if you look at year 2023 so far, the combined net inflows from IPOs and debt are nearly 66% of the inflows from secondary markets. FPIs may not be going overboard on secondary market equities, but they are surely diversified their asset mix. To sum up the story, IPOs and debt have infused nearly $7 billion into Indian markets in 2023. That is a great narrative, for sure.

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 13, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
18-Sep-23	300.84	300.84	36.22	36.22
19-Sep-23	0.00	300.84	0.00	36.22
20-Sep-23	-745.58	-444.74	-89.60	-53.38
21-Sep-23	-3,075.88	-3,520.62	-369.45	-422.83
22-Sep-23	-1,875.38	-5,396.00	-225.54	-648.37
25-Sep-23	-1,165.26	-6,561.26	-140.48	-788.85
26-Sep-23	-1,386.62	-7,947.88	-166.86	-955.71
27-Sep-23	137.82	-7,810.06	16.56	-939.15
28-Sep-23	-2,189.32	-9,999.38	-263.08	-1,202.23
29-Sep-23	0.00	-9,999.38	0.00	-1,202.23
02-Oct-23	0.00	-9,999.38	0.00	-1,202.23
03-Oct-23	-1,951.45	-11,950.83	-345.27	-1,547.50
04-Oct-23	-836.06	-12,786.89	-100.51	-1,648.01
05-Oct-23	-3,956.74	-16,743.63	-475.23	-2,123.24
06-Oct-23	-337.42	-17,081.05	-40.54	-2,163.78
09-Oct-23	270.60	-16,810.45	32.51	-2,131.27
10-Oct-23	772.83	-16,037.62	92.83	-2,038.44
11-Oct-23	-904.21	-16,941.83	-108.60	-2,147.04
12-Oct-23	-178.27	-17,120.10	-21.41	-2,168.45
13-Oct-23	-1,747.01	-18,867.11	-210.02	-2,378.47

Data Source: NSDL

The FPI selling in the week to October 13, 2023 was still there, but it was a lot more subdued compared to the frenetic selling in the first week of October 2023.

• In the previous 5 rolling weeks, FPI witnessed outflows of $(962) million, $(554) million, $(648) million, $(68) million, and $(658) million. The latest week saw net FPI outflows of just $(215) million; making it the sixth 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 Rs18,867 crore or $2.38 billion. This is the fifth 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 20, 2023.

• The big story will still be the geopolitical risk in the form of the Israel Hamas war in West Asia and the recent sanctions imposed on Russia. It remains to be seen if the US also imposes sanctions on Iran, for alleged links with the Hamas.

   

• With data flows largely done and dusted for now, the focus of FPIs will shift back to the US bond yields and the dollar index. Both have a significant impact on the domestic cost of funds and the USDINR equation. It is also a barometer of imported inflation into India.

   

• The major micro focus would still be on the quarterly results of Indian companies as the non-IT companies and banks are expected to announce most of the results in the next couple of weeks. That could set the tone for FPI flows in the coming week.

The geopolitical risk has suddenly changed the equations against EMs like India. In the past, such situations have only made FPIs shift their focus to more domestic oriented stocks in India. After all, that is where the real India story thrives.