Weekly Musings – FPI flows for week ended October 27, 2023

30 Oct 2023 , 07:16 AM

FPIs sell $1.25 billion in last two days of the week

The fourth week of October 2023 saw sustained selling by FPIs in equities. While IPO flows from FPIs were still positive and debt flows found favour in the week, the pressure was visible in the equity secondary market front. If the first week of October 2023 saw net FPI selling of $962 million, the second week was more subdued with 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 fourth week saw FPI selling surge to $987 billion with over $1.25 billion of selling happening in the last 2 days of the week, despite it being a truncated week. Rising geopolitical risks in the Middle East and West Asia were the key reasons for the FPI selling this week, but there was one more risk emerging. The markets are now increasingly veering around to the view that a slowdown in growth may happen, notwithstanding the positive picture painted by data flows.

Why is the market betting on an economic slowdown?

Last week we had mentioned how the FPI buying in debt was being triggered by the money lying in Russan oil vostro accounts in India. These funds are lying idle in India due to debates over which currency to denominate the oil trade in. That flow continued into India, although much of the funds would eventually get repatriated out of India. But the big story was the growing concern over a slowdown in the world economy. This is despite the fact that the first advance estimate of Q3 growth of the US economy came in at an impressive 4.9%. Remember, the PCE inflation continued to remain sticky at 3.4% for September. 

Markets are of the view that this dichotomy of growth being better than expected but inflation not coming down could drive the Fed to get more hawkish in the hope of nipping inflation faster. It is apprehended that the overenthusiasm may tip the global markets into recession. Also, the ongoing strife in the Middle East could create a situation wherein oil prices stay at a high level even as demand concerns prevent a runaway rally in oil. Overall, the slowdown could be caused by overenthusiasm of the policymakers about controlling inflation quickly, resulting in interest rates going being pushed above equilibrium levels. That concern is evident in the way bond yields have literally surged in the last few weeks.

What triggered FPI equity selling in the week to October 27, 2023

FPI selling of $987 million in the fourth week of October was even bigger than the $962 million of selling in the first week. The second and third week only saw FPI selling of $215 million and $284 million in the second and third weeks respectively. Of course, the overall flow situation is still OK if you add up the inflows from IPOs and debt, but the pressure is most visible in the secondary markets. Here is a quick look at the key factors that triggered FPI action in the latest week to October 27, 2023.

• The first pressure point was the number of companies reporting numbers below expectations. Among the big guns, Reliance Industries and Tech Mahindra reported numbers below street expectations. Of course, the Reliance impact will be felt next week, but that has been a general trend across large caps and mid-caps. Among other major companies where the results were below street expectations were Torrent Pharma, Balkrishan Industries, Finolex Industries, JSW Steel, Laurus Labs, Ultratech Cements, ITC Ltd, Havells, Coforge, Wipro, Avenue Supermarts etc. The broad message was that due to weak demand and higher costs, the companies across sectors and market caps were struggling to meet street expectations.

   

• A key reason for the selling was the inflation staying persistent in the US. For the third month in a row, the PCE inflation in the US stayed put at 3.4%. The core inflation had shown signs of improving, but what worries the market is that it still remains about 140 bps above the Fed target. And, this is after the Fed has already raised rates by 525 basis points. Markets are now apprehensive that the Fed may once again go all out to fix inflation by raising rates in the Paul Volcker model, irrespective of its impact on growth. The Fed already believes that it is not just about rates, but the strong labour data and the GDP strength is also holding inflation high. That leads to the next point.

   

• The other big data point for the week was the US first advance estimate of Q3 GDP at 4.9%. This is beyond most expectations. While this can be partially attributed to the base effect, it does indicate that the eventual GDP growth in 2023 could be well above the estimated 2.2%. Remember, this has already been hiked by 100 points and that was bullish enough. This is already causing concerns in the Fed that so much of growth would mean that purchasing power would remain robust in the near future and would prevent any lag effect of rate hikes on inflation. That may leave the Fed with no choice but to hike rates. This apprehension has led to rapid FPI selling.

   

• Geopolitical risk has remained at the forefront this week, as has been the case in the last 4 weeks. 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. There are already fears that Israel may be waging a full fledged war in the West Asia region with little being reported in the press. If the strife continues for longer, the other nations in the Middle East and West Asia are likely to get sucked into the war; either willingly or unwillingly. Not to forget, there are genuine chances that the US may impose sanctions on Iran and that could create tensions in Straits of Hormuz. That is hardly a situation that FPIs really cherish about investing in India.

   

• There are big IPOs opening in the coming week. Cello World and Mamaearth are likely to need about Rs3,600 crore of liquidity and both are likely to see a lot of interest from the FPIs also. Between now and Diwali, around 5 big IPOs are expected and the FPIs would be looking to keep cash handy. That largely has been a major reason for the FPIs to be monetizing some of the holdings in the secondary markets. That pressure was visible in the latest week and is likely to continue in the coming weeks also.

The signals of a slowdown in FPI flows were visible from August and September only reinforced the trend. October has actually shown a genuine spike in FPI outflows. IPO flows and debt flows are the big positive takeaways in terms of FPI action in India in October 2023, but the real pressure is felt in the secondary equity markets.

Macro FPI flow picture up to October 27, 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 #	(25,575.75)	5,219.30	(20,356.45)	5,795.37	(14,561.08)
Total for 2023	72,478.70	27,683.96	1,00,162.66	31,129.15	1,31,291.81
# – October Data is up to 27th 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 finer narrative in the FPI flows in October. While FPIs outflows in October 2023 from secondary markets was to the tune of Rs25,576 crore, strong inflows into IPOs and bonds were to the tune of Rs11,000 crore in October and largely compensated nearly half of the outflows in secondary markets. As a net result, the net overall outflows in October as of the end of the fourth week, is just about Rs14,561 crore. 

The picture becomes more meaningful for calendar 2023 as a whole. For the year to date, secondary market equity inflows were at Rs72,479 crore, supported by Rs27,684 crore from IPOs and Rs31,129 crore into debt. In short, if you look at year 2023 so far, the combined net inflows from IPOs and debt are over 81% 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, against $9 billion of FPI inflows into secondary markets, another $7.3 billion into IPOs and debt combined is surely something to savour.

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 27, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
02-Oct-23	0.00	0.00	0.00	0.00
03-Oct-23	-1,951.45	-1,951.45	-345.27	-345.27
04-Oct-23	-836.06	-2,787.51	-100.51	-445.78
05-Oct-23	-3,956.74	-6,744.25	-475.23	-921.01
06-Oct-23	-337.42	-7,081.67	-40.54	-961.55
09-Oct-23	270.60	-6,811.07	32.51	-929.04
10-Oct-23	772.83	-6,038.24	92.83	-836.21
11-Oct-23	-904.21	-6,942.45	-108.60	-944.81
12-Oct-23	-178.27	-7,120.72	-21.41	-966.22
13-Oct-23	-1,747.01	-8,867.73	-210.02	-1,176.24
16-Oct-23	381.53	-8,486.20	45.82	-1,130.42
17-Oct-23	-392.85	-8,879.05	-47.18	-1,177.60
18-Oct-23	590.58	-8,288.47	70.94	-1,106.66
19-Oct-23	-1,989.61	-10,278.08	-238.97	-1,345.63
20-Oct-23	-951.93	-11,230.01	-114.31	-1,459.94
23-Oct-23	1,801.60	-9,428.41	216.54	-1,243.40
24-Oct-23	0.00	-9,428.41	0.00	-1,243.40
25-Oct-23	409.88	-9,018.53	49.28	-1,194.12
26-Oct-23	-4,025.21	-13,043.74	-484.08	-1,678.20
27-Oct-23	-6,396.40	-19,440.14	-768.39	-2,446.59

Data Source: NSDL

The FPI selling in the week to October 27, 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 $(284) million, $(215) million, $(962) million, $(554) million, and $(648) million. The latest week saw net FPI outflows of $(987) million; making it the eighth consecutive 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 Rs19,440 crore or $2.45 billion. This is the seventh time in the last 5 months that the rolling 4-week FPI flows have been negative. FPI selling pressure in equities is surely adding up in recent months.

What will drive FPI flows in the coming week?

There will be 2 key drivers of FPI flows in the next week.

• The big story will still be the geopolitical risk in the form of the Israel Hamas war. The other risk of rising US bond yields is reflective of more rate hikes by the Fed; and that is not good news. Slowdown could be an outcome. 

   

• In terms of India data flows, the core sector will be tested this week after 3 consecutive months of robust growth. In addition, the markets will closely track the update on the fiscal deficit front to check if the 5.9% goal is on target.

Geopolitical risk remains the big story and that is driving a lot of safe haven investing. That is clearly weighted against emerging markets like India and that looks unlikely to change in a hurry.