Weekly Musings – FPI flows for week ended September 01, 2023

4 Sep 2023 , 06:46 AM

The month of August was almost like a whimper after 3 months of big bang FPI inflows. FPIs infused just Rs12,262 crore or $1.48 billion in the month of August 2023. That is not entirely disappointing. However, that does look paltry after FPIs had infused nearly $17 billion in the previous 3 months. That is still about $18.5 billion infused in the last 4 months since May 2023, which is a lot of FPI flows in a span of just 4 months. For the latest week to September 01, 2023, the FPI flows were relatively tepid at $343 million. FPI flows have been cautious for several reasons. Not surprisingly, the FPIs have turned risk-off and that is evident in the pace of portfolio flows into Indian equities as the Nifty nears its all-time highs. Also, FPIs have become sceptical after the Nifty struggle to decisively cross above the 20,000 mark. Over the last one month, as FPI flows have slowed, the Nifty has only struggled, making lower tops and lower bottoms in the process.

In the latest week to September 01, 2023, the FPI flows into equities were $343 million, compared to $278 million, $617 million, and $641 million in the previous 3 weeks. Like in the previous two weeks, event he lates week saw a lot of big block deals where FPIs were on the sell side with the Sula Vineyards deal being the most prominent during the week. FPIs have also been slightly ambivalent as the trajectory of the US rates is still not too clear. Also, it is not too clear how the RBI plans to react to the sudden spike in consumer inflation to 7.44% in the month of July 2023. In the last 4 weeks, the FPIs have infused $1.88 billion into Indian equities, but that is a far cry from the $17 billion of FPI inflows into equities between May and July 2023. However, it remains to be seen if the robust GDP data for India in the first quarter ended June 2023, makes a difference to FPI sentiments.

FPI flows continue to remain tepid in the latest week

The month of August 2023 was always supposed to be tepid compared to the robust flows of May, June, and July. However, the fall in FPI flows was relatively very sharp. For August, the FPI flows at $1.48 billion was roughly a fourth of the average flows in the previous 3 months. Also, if you look at the latest week, FPI flows stood at just $343 million, which is much lower than the weekly average of the last 4 months. There were several factors that contributed to the slowing of FPI flows into India. 

• The twin downgrades in the US may be old news, but the overhang is still there and it is still driving risk-off capital flows away from emerging markets like India. In the early part of August 2023, Fitch had downgraded US debt a notch from AAA to AA+. In addition, Moody’s had also downgraded small and mid-sized US banks, which looked most vulnerable. That story may have played out, but till that risk persists, it would take some effort for India FPI flows to revive.

   

• Last week, there was a lot of uncertainty on the global data flow front. The second estimate of Q2 GDP growth in the US was downsized by 30 bps from 2.4% to 2.1%. That was a hint that soft landing may be easier said than done. At the same time, the PCE inflation (what the Fed uses for setting the rates trajectory) bounced by 30 bps from 3.0% to 3.3%, including a 10 bps bounce in core PCE inflation. This had led to the view that the Fed may front-end rate hikes in Late September itself.

   

• Of course, India inflation is still a major issue and it does not seem to be going away in a hurry. July 2023 consumer inflation in India spiked from 4.81% to 7.44% and that has raised a dilemma for the RBI. If it hikes rates, it impacts cost of funds for corporates and hits the solvency ratios of industrials. However, if the RBI delays on rate hikes then it could find Indian bonds priced out of the market due to lower real returns. FPIs may need more clarity on this front. What FPIs are worried is that rising inflation combined with robust GDP growth may lead the RBI to experiment with a pause for longer and widen the real rate gap. That is forcing FPIs to stay on the sidelines.

   

• The dual impact of the INR and crude prices are also playing on the minds of the FPIs. The rupee had strengthened in the previous week on the back of RBI intervention, but this week again saw the rupee weakening slightly. That raises question on the dollar returns for FPIs. Also, crude oil prices spiked during the week from $84.40/bbl to $88.10/bbl as Russia and the OPEC agreed to cut supplies amidst hopes of demand reviving in China and rest of the world. FPIs normally stay cautious on Indian equities when oil prices are surging, due to India’s overt dependence on imported crude.

In a nutshell, it is a mix of factors spurring weak FPI flows in recent weeks. It remains to be seen if FPIs come back to invest in India, and whether August was just a brief pause before the deluge of FPI flows. The longer term perspective of Indian equities is still positive, but that is normally a very difficult story to sell in tough times.

Macro FPI flow picture up to September 01, 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 #	1,366.72	-108.16	1,258.56	60.57	1,319.13
Total for 2023	1,13,997.57	22,547.60	1,36,545.17	24,437.24	1,60,982.41
# – September Data is up to 01st September

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

The longer term FPI flows captured in the table above provide a much better perspective. Despite net FPI flows of just $1.48 billion in August 2023, the FPIs are clearly and decisively buyers in equity in the year 2023. More importantly, the inflows into equities in 2023 has more than offset the outflows in 2022. For instance, as of date in 2023, the FPI inflows into equity stand at Rs1.37 trillion compared to outflows of Rs1.21 trillion in 2022. The story remains positive, even if you look at overall flows of equity and debt combined. Against net outflows of Rs1.33 trillion in 2022, the FPIs have infused Rs1.61 trillion overall into equity and debt till date in 2023. In 2023, debt saw record inflows of Rs24,437 crore.

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 September 01, 2023.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
07-Aug-23	66.39	66.39	8.02	8.02
08-Aug-23	2,251.98	2,318.37	272.16	280.18
09-Aug-23	-58.45	2,259.92	-7.06	273.12
10-Aug-23	996.94	3,256.86	120.38	393.50
11-Aug-23	2,048.64	5,305.50	247.31	640.81
14-Aug-23	-2,534.61	2,770.89	-306.18	334.63
15-Aug-23	0.00	2,770.89	0.00	334.63
16-Aug-23	0.00	2,770.89	0.00	334.63
17-Aug-23	8,643.48	11,414.37	1,041.99	1,376.62
18-Aug-23	-986.97	10,427.40	-118.73	1,257.89
21-Aug-23	574.85	11,002.25	69.19	1,327.08
22-Aug-23	-1,277.22	9,725.03	-153.67	1,173.41
23-Aug-23	-108.75	9,616.28	-13.09	1,160.32
24-Aug-23	901.63	10,517.91	108.73	1,269.05
25-Aug-23	2,205.79	12,723.70	267.20	1,536.25
28-Aug-23	-1,706.33	11,017.37	-206.45	1,329.80
29-Aug-23	2,476.01	13,493.38	299.71	1,629.51
30-Aug-23	792.77	14,286.15	95.92	1,725.43
31-Aug-23	9.86	14,296.01	1.19	1,726.62
01-Sep-23	1,258.56	15,554.57	152.23	1,878.85

Data Source: NSDL

The week to September 01, 2023 saw net FPI inflows of $343 million which is lower than the average of $1 billion plus that we have seen in the last 3 months. That could be partially due to block selling by FPIs. Here is what we read from the above table. 

• In the previous 3 rolling weeks, FPI infusion into Indian equities has been $278 million, $617 million, and $641 million. The latest week saw net FPI inflows relatively insipid at $343 million; albeit due to key blocks in stocks like Sula Vineyards.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total FPI flows into Indian equities were Rs15,555 crore or $1.88 billion. In the last 20 trading sessions, there have been 12 days of net buying, 2 days of holidays and 6 days of net selling. For now, the FPI bias still remains towards the buy side.

Key drivers of FPI flows in coming weeks?

FPIs are likely to focus on 4 major data points, which will largely determine the colour, direction, and quantum of flows into Indian equities. 

• Firstly, there will be a reaction to the US data flows towards the end of the previous week. The GDP growth for Q2 fell by 30 bps as per the second estimate while the PCE inflation came in higher than expected at 3.3%. The FPIs would be keen to know how this combination would be interpreted by the Fed since a rate hike may reject the theory of soft landing in the current scenario in the US.

   

• The second issue would be the reaction to key India data. India real GDP growth for the June quarter came in at an impressive 7.8% with nominal GDP growth at 8%. While FPIs will be pleased with the real GDP growth, they would be concerned about the lower than expected growth in nominal GDP growth. Also, the core sector growing above 8% for 2 months in succession shows a lot of externalities chipping in.

   

• For the coming week, oil prices in the Brent market will continue to be focus for FPIs due to India’s overt dependence on crude imports, to the tune of nearly 85%. Brent Crude rallied sharply in the week from $84.40/bbl to $88.10/bbl, as Russian oil minister Alexander Novak hinted that the OPEC and Russia (OPEC Plus) may collaborate on more supply cuts in September and October. This could push oil above $90/bbl posing some difficult choices for Indian economy.

   

• The USDINR will continue to drive the colour of FPI flows. FPIs prefer a steady USDINR, as it preserves dollar returns. Two weeks back, the rupee had weakened to its lowest point of 83.16/$ which made FPIs cautious. The previous week saw RBI intervention pulling up the rupee, but rupee was largely stable this week. FPIs would be OK as long as the RBI can defence the rupee around the 83/$ mark.

Currently, the typical FPI trade is long on domestic India plays and short on global plays. There is a preference for banks and consumer discretionary over IT and pharma. FPIs have also evinced interest in capital goods, where the revival of capital cycle is likely to be the added bonus. For now, the FPI flows are likely to remain slow, till there is clarity on the trajectory of rates and the policy response of central banks like the Fed and RBI. However, the long term story continues to remain intact; at least for now.