Weekly Musings – FPI flows for week ended February 23, 2024

26 Mar 2024 , 03:16 PM

HAVE FPIS TURNED BUYERS, AT LAST?

FPI s ended up net buyers in equities for the week to February 23, 2024. While the trading was on all the five days, the FPI flow reporting was only done for 4 days, due to Monday being a clearing holiday. For the week, the FPIs were net buyers to the tune of $404 Million. While it may be too early to predict a recovery in FPI flows into equities, it underlines the fact that FPI selling may be tiring out. After all, even the interim budget has been fairly impressive on fiscal prudence and infrastructure investments; so effectively the FPIs have very little to complain about. In the current week to February 23, 2024, the FPIs were net buyers in equities to the tune of $404 Million. In the 5 weeks prior to the current week, the FPIs were net sellers of $84 Million, net sellers of $618 Million, net buyers for $126 Million, net sellers of $1,706 Million, and net sellers of $2,033 Million. While the FPI selling in January has not sustained in February, equity buying is still not too decisive by the FPIs.

To be fair, the real action in the first few weeks of calendar 2024 has been in debt markets and not in equities. FPIs are making big bets on the RBI cutting rates for two reasons. Firstly, the real rate of interest is now above 2% and that is just too high by anecdotal standards. Secondly, the repo rate is still about 135 bps above the pre-COVID rate and that needs to be restored so that the next phase of growth is supported by a favourable cost of funds environment. But, the real story that the FPIs are playing for is the likely inclusion of India G-Secs into the JP Morgan global bond index as well as into the Bloomberg Bond index. That is likely to trigger buying in Indian bonds to the tune of $35 Billion by global passive funds and we are seeing a lot preparatory buying in the debt markets from FPIs. That has actually helped the FPIs to remain net buyers in India on an overall asset class basis.

BIG DATA WAIT: INDIA GDP AND INDIA CAD

The FPIs would be awaiting two important pieces of Indian data in the next few weeks; and that is likely to set the tone for FPI flows into equities. The first trigger will be the third quarter GDP numbers for FY24, which will be announced on the last day of February. This will not only provide a picture of full year FY24 GDP growth as well as the likely trajectory for FY25. If Q3 growth also stays in the vicinity of 7.5%, then it could be a big sentiment booster for the FPI flows. 

The second big trigger point is the updated CAD (current account deficit) as a share of GDP. This will be announced towards the end of March for the third quarter. If the current account deficit stays in the range of 1.0% and 1.5%, the FPIs are likely to take the data very positively. The interim budget has made a strong statement on its support for fiscal prudence, and the only thing that the FPIs are worried about is whether the Red Sea crisis will have an impact on the CAD figure for India. 

MACRO FPI FLOW PICTURE UP TO FEBRUARY 23, 2024

The table captures monthly FPI flows into equity and debt for 2022, 2023, and 2024.

Calendar  Month	FPI Flows Secondary	FPI Flows Primary	FPI Flows Equity	FPI Flows Debt/Hybrid	Overall FPI Flows
Calendar 2022 (₹ Crore)	(146,048.38)	24,608.94	(121,439.44)	(11,375.78)	(132,815.22)
Calendar 2023 (₹ Crore)	1,27,759.75	43,347.14	1,71,106.89	65,954.38	2,37,061.27
Jan-2024 (₹ Crore)	(28,863.89)	3,120.34	(25,743.55)	19,150.21	(6,593.34)
Feb-2024 # (₹ Crore)	(2,991.29)	2,567.45	(423.84)	25,649.82	25,225.98
Total for 2024 (₹ Crore)	(31,855.18)	5,687.79	(26,167.39)	44,800.03	18,632.64
For 2024 ($ Million)	(3,832.29)	684.91	(3,147.38)	5,395.02	2,247.64
# – Recent Data is up to February 23, 2024

Data Source: NSDL (Negative figures in brackets)

As of February 23, 2024, the FPIs consolidated their position as net buyers in the year 2024 across equity and debt combined. For calendar 2024 overall, the FPIs were net buyers to the tune of $2,247.64 Million. However, that is more because the debt inflows have more than offset equity outflows. For 2024 so far, FPIs net sold equities worth $3,147.38 Million but were net buyers in debt to the tune of $5,395.02 Million. Of course, these are early days for 2024 and we will need more data points. However, there are 2 things that emerge. Firstly, FPIs shifting between equity and debt is a signal that they are still bullish on the idea of investing in India, but are just allocating more funds to debt.  Secondly, the domestic heft of mutual funds, LIC and the retail investors is so decisive today; that FPIs flows have become one of the factors; rather than being the only factor that driving the market direction.

FPI SENTIMENTS – THE WEEK THAT WAS

For the latest week to February 23, 2024, FPI inflows showed signs of picking up at $404 Million of net inflows into equities. More importantly, debt flows continued to be positive leaving FPIs net buyers overall in February and for calendar 2024. Here are the 5 key data points that influenced FPI action in the week to February 23, 2024.

1. The RBI announced the minutes of the Monetary Policy Meeting during the week. The message appears to be quit clear; that rate cuts were not on the table for now. The members of MPC held the status quo on rates as well as on the stance; with only one of the six members expressing reservations about holding the rates. Now, the RBI has held status quo on rates since February 2023. In the minutes of the MPC, almost all the members appeared to unanimously believe that India had managed a soft landing; i.e., controlling inflation with higher rates, but without impacting the growth engine.

    

2. The US Federal Reserve also published its minutes of the Fed meet held on January 31, 2024, during this week. The Fed continued to be very cautious and the sense was that the last mile was going to be the toughest part of the story when it came to reining in inflation. However, the good news is that the minutes clearly hinted that rate hikes were over. However, the Fed has committed to provide a rate cut time table only after they had incontrovertible evidence that inflation was moving towards the 2% mark. It is now being expected that rate cuts may commence only after June this year.

    

3. The start-up situation in India continues to get confounded with the two cases of Byju’s and Paytm; two of the most valuable start-ups in India. Byju’s has seen its market valuation dip by 90% and the promoters are wiling to raise money for the company, even at these depressed valuations. But the bigger chaos is over the colour of the management team, with the major PE stakeholders voting for the removal of Byju Raveendran. In the case of Paytm, they may have got some extra time from the RBI, but the risk of operating in the grey fintech area continues to be a major risk for start-ups in India. That is likely to weigh on future start-up listings and IPOs this year.

    

4. During the week, leading investing house, Goldman Sachs, downgraded the Indian banking sector. It has specifically turned bearish on banks like ICIC Bank and SBI at the current levels. The argument of Goldman Sachs is that the gap between the growth rate of loans and the growth of deposits is too high. The banks have to now go for higher cost deposits to fill the gap and that could lead to compression of margins. In the last few quarters, banks gained from loans priced up, but deposit rates hardly moving. That led to record spike in net interest income (NII) and much wider net interest margins (NIMs). According to Goldman Sachs, this Goldilocks moment for banks is over and it will now be a return to reality. Goldman Sachs turned underweight on the banking sector in India.

    

5. Finally, we come to oil prices, which edged lower to $81.5/bbl in the Brent Crude market at the close of the week to February 23, 2024. After the ceasefire talks failed, there has been little let-up either from Israel or from the Hamas and Houthi rebels. Increasingly, ships are now taking the Horn of Africa route, with implications for delivery time schedules, freight costs and insurance costs. This week, while the Red Sea concerns persist, the macro concerns over growth are also back. More so, with the UK and Japan officially slipping into recession, there are serious question being raised about whether the demand for oil can continue to be robust. That depressed oil prices this week.

Needless to say, FPIs remain cautious on India amidst political uncertainty, but that has always been more of a technical issue, than a fundamental concern for FPIs. For now, they are staying light on India, and probably the first pre-poll surveys should offer some clarity for the global investors. 

DAILY FPI EQUITY FLOWS FOR LAST 4 ROLLING WEEKS

Here we look at the last 4 rolling weeks data on FPI flows as it shows us a time series moving average of FPI flows.

Date	FPI Flow (₹ Crore)	Cumulative flows	FPI Flow($ Million)	Cumulative flow
29-Jan-24	5,069.88	5,069.88	609.98	609.98
30-Jan-24	-4,264.40	805.48	-512.86	97.12
31-Jan-24	-1,814.65	-1,009.17	-218.32	-121.20
01-Feb-24	1,740.15	730.98	209.45	88.25
02-Feb-24	312.64	1,043.62	37.69	125.94
05-Feb-24	228.48	1,272.10	27.58	153.52
06-Feb-24	762.88	2,034.98	91.88	245.40
07-Feb-24	-472.77	1,562.21	-56.91	188.49
08-Feb-24	-1,601.32	-39.11	-192.99	-4.50
08-Feb-24	-4,044.84	-4,083.95	-487.47	-491.97
12-Feb-24	330.32	-3,753.63	39.80	-452.17
13-Feb-24	220.37	-3,533.26	26.56	-425.61
14-Feb-24	233.61	-3,299.65	28.14	-397.47
15-Feb-24	-2,628.26	-5,927.91	-316.33	-713.80
16-Feb-24	1,143.05	-4,784.86	137.70	-576.10
19-Feb-24	0.00	-4,784.86	0.00	-576.10
20-Feb-24	172.68	-4,612.18	20.79	-555.31
21-Feb-24	2,973.50	-1,638.68	358.39	-196.92
22-Feb-24	393.71	-1,244.97	47.50	-149.42
23-Feb-24	-188.04	-1,433.01	-22.67	-172.09

Data Source: NSDL

The week to February 23, 2024 saw FPI inflows of $404 Million, after a brief interlude of two weeks of selling prior to that. Here is a quick run-down.

• In last previous 5 rolling weeks, FPIs had seen net inflows of $84 Million, net outflows of $618 Million, net inflows of $126 Million, net outflows of $1,706 Million, and net outflows of $2,033 Million. The latest week to February 23, 2024 saw net FPI inflows from equities to the tune of $404 Million, which was a rather encouraging trend, especially if you consider the elevated levels of VIX in the market.

   

• If you look at the last 4 rolling weeks on a cumulative basis, total net FPI outflows from Indian equities were just ₹(1,433) Crore or $(172) Million. The rolling 4-week flows are still negative, but the intensity of outflows has been certainly reducing and it is moving towards a positive figure after a long break.

One clear trend emerging from the FPI flow story is the perceptible shift from equity towards debt. That is logical asset allocation and it is good for the Indian markets.

WHAT WILL DRIVE FPI FLOWS IN COMING WEEKS?

There will be 3 key drivers of FPI flows in the coming weeks.

• There is the big GDP data that is coming out in the coming and Indian GDP is expected to stay above 7% growth in the third quarter too. GDP robustness will be key to FPI flows.

   

• The US will announce the second estimate of Q4-GDP and the PCE inflation, both of will have a serious impact on FPI flows into EMs like India.

   

• Finally, the core sector will be watched due to the infrastructure thrust as well as the latest update on the fiscal deficit for FY24; and whether it is on target.

One quick takeaway from the FPI story for the week to February 23, 2024 is that; FPIs are more confident of debt than of equities. However, it does look like the FPI attitude towards equities may be recovering faster than expected.