Weekly Musings – FPI flows for week ended October 20, 2023

23 Oct 2023 , 07:01 AM

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

The third week of October 2023 saw continued selling by FPIs in equities. While IPO flows from FPIs were still positive, the pressure was visible in the secondary market front. Check out the numbers. If the first week of October 2023 saw net FPI selling of $962 million, the second week saw more subdued FPI selling of $215 million. In the third week of October 2023, net FPI selling in equities was to the tune of $284 million, with most of the selling coming on the last 2 days of the week. The big driver of selling was the geopolitical risk with the war escalating between Israel and Gaza leading to an increasing toll of human life. It looks very likely that other powerful nations in the Middle East like Iran and Saudi Arabia would also be forced to get involved and if US sanctions on Iran come by, things would only get worse. Meanwhile, the rising bond yields in the US to above 4.90% has also put pressure on FPI flows into India. But, let us digress for a moment and look at why FPI flows into debt have been so robust in recent months.

Oil money driving up debt market flows

FPIs have already infused Rs5,591 crore into Indian debt in October so far with debt market inflows by FPIs at Rs30,925 crore for the calendar year so far. This is a sharp departure from the previous year when FPIs were net sellers in debt due to rate differential concerns. However, this time around, the factor that is driving FPI flows into Indian debt is the Russian vostro accounts with Indian banks for oil exports. Today Russia accounts for 40% of India’s oil import basket, but there is still uncertainty over which currency to denominate the trade in. Most hard currencies like the US dollar, Pound, Euro, and Yen are ruled out as these nations have sanctioned Russia. Currently, payments to Russian exporters are happening in Dirhams, Roubles, and Indian rupees; but within limits. Russia is willing to accept larger payments in Chinese Yuan, but India has ruled that out for obvious reasons. That means most of these export proceeds are just kept in the vostro accounts with Indian banks. Such money cannot be used for any other purpose, other than repatriating it back to Russia or for investing the money in government securities. That has led to a lot of this oil money from the vostro accounts of Russian exporters flowing into Indian government debt paper.

What triggered FPI equity selling in the week to October 20, 2023

To be fair, FPI selling of $284 million in the third week of October is much smaller than the $962 million selling in Indian equities in the first week of October. However, it is certainly higher than the $215 million of FPI equity selling in the second week of October. This is largely, thanks to the IPO inflows from FPIs and that is likely to grow as more mainboard companies announce IPO plans. Here is a quick look at the key factors that triggered FPI action in the latest week to October 20, 2023.

• One of the factors that FPIs have been tracking closely in the Indian markets is the quarterly results for Q2FY24. IT companies like Infosys, Wipro, and HCL Technologies have given weaker than expected guidance. In the latest week, two other sectors also disappointed in terms of growth and margins outlook. Banks saw pressure on NII growth and NIM, including the big names HDFC Bank and ICICI Bank. Also, the numbers of the FMCG giants like ITC and Hindustan Unilever showed pressure coming from higher operating costs and weak rural sales. FPIs are also wary ahead of the Reliance Industries results in the coming week.

   

• In an address during the week in New York, the Fed chair Jerome Powell continued to harp on the need to continue its hawkish stance. However, he raised some interesting points, which has spooked global FPI sentiments about investing in India. Powell has underlined the need for the Fed to be prepared for two different kind of situations; one of normalizing inflation and the other of rising inflation. According to Powell, even if inflation does no spike immediately, the indications coming from the GDP front and the labour market front are still very bullish. That is normally consonant with higher inflation, which is what the Fed must be prepared. The big risk, according to Powell, is that growth and labour market may not taper to the extent anticipated.

   

• 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 US dollar index during the week as it tapered from 106.65 levels to 106.15 levels. However, due to the rising bond yields in the US, the dollar index is not exactly coming below 106 levels and that is making FPIs wary of investing in EMs like India. The other issue is of US bond yields, which spiked this week to 4.99% this week before closing at 4.91%. The bond  yields are already at a 22 year high and there are strong expectation of US bond yields now going beyond 5% after a very long gap.

   

• Geopolitical risks have remained at the forefront this 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. With the civilian casualties mounting, it is very likely that other nations like Iran and Saudi Arabia may also get involved in this conflict in different ways. The pressure on oil price was visible on fears that sanctions on Iran could lead to disruptions in the Straits of Hormuz, which is controlled by Iran. The situation remains fluid and FPIs have been wary.

   

• In terms of India data flows, there were two major issues in the week. The WPI inflation came in at a 6-month high of -0.26%. However, it was expected to bounce into positive, which did not happen. Pressure on China growth has kept input costs under pressure and that is delaying the WPI inflation getting back into positive. The other big announcement was the RBI MPC minutes. While the pause in rates look here to stay, members have warned that if the global situation worsened, then central banks globally may be inclined towards tightening.

The signals of a slowdown in FPI flows were visible from August and September only reinforced the trend. October started on a negative note, with FPI selling of Rs12,146 crore in equities in the first 3 weeks. IPO flows and debt flows are the big positive takeaways in terms of FPI action in India in October 2023.

Macro FPI flow picture up to October 20, 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 #	(16,176.95)	4,030.63	(12,146.32)	5,591.16	(6,555.16)
Total for 2023	81,877.50	26,495.29	1,08,372.79	30,924.94	1,39,297.73
# – October Data is up to 20th 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 Rs16,177 crore, strong inflows into IPOs and bonds more than made up for the sell-off. As a net result, the net outflows in October as of the third week, on an overall basis, is just about Rs6,555 crore. 

The picture becomes more meaningful for calendar 2023 as a whole. For the year to date, secondary market equity inflows were at Rs81,878 crore, supported by Rs26,495 crore from IPOs and Rs30,925 crore into debt. In short, if you look at year 2023 so far, the combined net inflows from IPOs and debt are over 70% of the inflows into secondary markets. FPIs may not be going overboard on secondary market equities, but they have diversified their asset mix. To sum up the story, IPOs and debt have infused nearly $7 billion into Indian markets in 2023. That is an alternative narrative, one must not lose sight of.

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 20, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
25-Sep-23	-1,165.26	-1,165.26	-140.48	-140.48
26-Sep-23	-1,386.62	-2,551.88	-166.86	-307.34
27-Sep-23	137.82	-2,414.06	16.56	-290.78
28-Sep-23	-2,189.32	-4,603.38	-263.08	-553.86
29-Sep-23	0.00	-4,603.38	0.00	-553.86
02-Oct-23	0.00	-4,603.38	0.00	-553.86
03-Oct-23	-1,951.45	-6,554.83	-345.27	-899.13
04-Oct-23	-836.06	-7,390.89	-100.51	-999.64
05-Oct-23	-3,956.74	-11,347.63	-475.23	-1,474.87
06-Oct-23	-337.42	-11,685.05	-40.54	-1,515.41
09-Oct-23	270.60	-11,414.45	32.51	-1,482.90
10-Oct-23	772.83	-10,641.62	92.83	-1,390.07
11-Oct-23	-904.21	-11,545.83	-108.60	-1,498.67
12-Oct-23	-178.27	-11,724.10	-21.41	-1,520.08
13-Oct-23	-1,747.01	-13,471.11	-210.02	-1,730.10
16-Oct-23	381.53	-13,089.58	45.82	-1,684.28
17-Oct-23	-392.85	-13,482.43	-47.18	-1,731.46
18-Oct-23	590.58	-12,891.85	70.94	-1,660.52
19-Oct-23	-1,989.61	-14,881.46	-238.97	-1,899.49
20-Oct-23	-951.93	-15,833.39	-114.31	-2,013.80

Data Source: NSDL

The FPI selling in the week to October 20, 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 $(215) million, $(962) million, $(554) million, $(648) million, and $(68) million. The latest week saw net FPI outflows of $(284) million; making it the seventh 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 Rs15,833 crore or $2.01 billion. This is the sixth time in the last 5 months that the rolling 4-week FPI flows have been negative. FPI selling pressure is adding up in recent months; although debt flows are the positive story.

What will drive FPI flows in the coming weeks?

There will be 3 key drivers of FPI flows in the coming week to October 27, 2023.

• The big story will still be the geopolitical risk in the form of the Israel Hamas war. In addition, the US bond yields and the US dollar index will also be in focus due to their criticality to FPI flows into India.

   

• In terms of global data flows, the coming week will see the US PCE inflation and the first estimate of Q3 GDP announced by the Bureau of Economic Analysis (BEA). Both have major implications for the way the US Fed approaches rates.

   

• In terms of India data flows, the core sector will be tested after 3 consecutive months of robust growth. In addition, the markets will closely track the update on the fiscal deficit front to check for progress towards the 5.9% target at the FY24 half-way mark.

Geopolitical risk remains the big story and that is driving a lot of safe haven investing. That is not going away in a hurry.