Weekly Musings – FPI flows for week ended June 2, 2023

5 Jun 2023 , 08:44 AM

By the time the month of May was over, the total FPI flows for the calendar year 2023 had turned decisively into positive territory. There were several reasons for this new found FPI enthusiasm in May 2023. The momentum turned favourable in March 2023 after two consecutive months of FPI selling. However, March flows were purely driven by the mega GQG Partners investment into the Adani group worth $1.90 billion. Had it not been for that single investment, FPIs would have been net sellers in March 2023 also.

April was decisively more in the affirmative, with $1.42 billion of FPI inflows. However, the real thrust came in May 2023 when FPIs infused more than $5.5 billion into Indian equities. There was a consensus that global central banks would now tread more carefully on their hawkish paths. Indian fourth quarter results were much better than expected as a sharp fall in commodity prices led to a surge in gross margins of Indian companies. Towards the end of May 2023, the Q4 GDP at 6.1% and FY23 GDP at 7.2% were morale boosters for FPI flows. Let us look at the macro picture of overall FPI flows first.

Macro Picture of FPI flows – Equity and non-equity flows

The table captures monthly FPI flows into equity and debt for 2022 and 2023, with the latter being month-wise.

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 #	6,149.55	339.92	6,489.47	-672.10	5,817.37
Total for 2023 #	26,518.30	9,229.40	35,747.70	7,160.35	42,908.05
# – June Data is up to 02nd June only

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

We now have the FPI flow data up to the 02nd of June and the outcome of the frenetic buying in May and June has been that FPIs turned net buyers for calendar year 2023, despite the heavy selling in January 2023. As of 02nd June, FPIs have infused over $4 billion into Indian equities and over $5 billion into Indian equities and debt in calendar year 2023 so far. What were the triggers?

• The first trigger for the turnaround in FPI flows was the hint that global hawkishness may be about to end. The RBI has not raised rates after February and the minutes of the Fed meet in May clearly underlined that the FOMC was now split between the hawks and the doves. That is good news for the markets overall.

   

• The second major trigger for the FPI flows was the gradual reduction in risk-off investing. Globally investors are seeing growth return and are becoming less risk-averse. That has led to a surge in flows into emerging markets, including India. Also, the liquidity tightening has been gradually and that has not impacted FPI passive flows.

   

• The third trigger was more domestic in nature and had to do with the quarter results and the full year results of Indian companies for FY23. The quarter saw several positives. The interest cost, as a percentage of sales, started to taper; resulting in an improvement in the interest coverage. In addition, there was revival in rural sales while the sharp slump in commodity prices ensured that gross margins of most manufacturing companies improved in the fourth quarter. These helped FPI flows a good deal.

   

• The fourth trigger is macro in nature. India is seeing inflation coming rapidly under control, while economic growth is still holding. For FY23 and for the Q4 period, the GDP growth at 7.2% and 6.1% respectively was much better than anticipated. This combination of steady growth amidst falling inflation, combined with a neutral RBI stance, is leading to substantial FPI flows into India. May 2023 could just be the start.

If you look at the 2023 flows so far, we have seen inflows of over $4 billion into equities and over $5 billion if you combine equity and debt. That means, the concerns over the interest rate differential between India and the US are also diminishing. Let us now turn to a micro picture of how the FPI flows into Indian equities panned out day-wise for the last 3 weeks.

Day-wise FPI equity flows in last 2 weeks

The table below gives a granular picture of daily flows into Indian equities in the month of April 2023; both in rupee and in dollar terms. The lates week has been shaded.

Date	FPI Flow (Rs Crore)	Cumulative flows	FPI Flow($ billion)	Cumulative flow
15-May-23	1,587.34	1,587.34	193.20	193.20
16-May-23	1,880.04	3,467.38	228.48	421.68
17-May-23	1,715.90	5,183.28	208.56	630.24
18-May-23	605.79	5,789.07	97.83	728.07
19-May-23	1,804.64	7,593.71	218.80	946.87
22-May-23	752.67	8,346.38	91.01	1,037.88
23-May-23	1,289.58	9,635.96	155.75	1,193.63
24-May-23	319.38	9,955.34	38.57	1,232.20
25-May-23	1,497.86	11,453.20	181.07	1,413.27
26-May-23	2,511.68	13,964.88	303.53	1,716.80
29-May-23	1,789.66	15,754.54	216.35	1,933.15
30-May-23	2,290.42	18,044.96	277.46	2,210.61
31-May-23	2,441.34	20,486.30	295.09	2,505.70
01-Jun-23	3,837.49	24,323.79	464.15	2,969.85
02-Jun-23	2,651.98	26,975.77	321.62	3,291.47

Data Source: NSDL

Based on the 3 weeks of rolling FPI flows into equities, here are some interesting inferences that can be drawn.

• We have covered FPI flows into equities over the last 3 weeks in succession. Interestingly, the FPIs have been net buyers in equities on each of these days in the last 3 weeks.

   

• For the week to 19-May, the FPI net inflows into equities stood at Rs7,894 crore or $947 million. For the week to 26-May, the FPI net inflows into equities stood at Rs6,371 crore or $770 million. 

   

• For the latest week to 02-June, the FPI net inflows into equities stood at Rs13,011 crore or $1,575 million. Overall, if you look at the last 3 weeks on a cumulative basis, total FPI flows into Indian equities were Rs26,976 crore or $3.29 billion.

Over the last 3 weeks, FPIs have not just been consistently on the buy side of Indian equities, but have also progressively built heft in terms of EM flows in general and India equity inflows in particular.

How do we see the FPI flows story in June 2023?

How do we see FPI flows into Indian equities in the rest of the month of June 2023? Debt flows are likely to remain positive while the real story may still like in equity flows. After all, in the 9 months between October 2021 and June 2022, we have seen FPI outflows of $34 billion. The FPI flows are still a long way from making up for that fully. For now, the good news is that there has been a turnaround in FPI sentiments with decisively positive FPI flows into equity and debt in calendar year 2023 so far.

Three factors would still hold the key to FPI flows into India. Firstly, the Fed must stick to its promise of rates topping out. That presupposes a consistent and sustained fall in inflation. That would give FPIs comfort in terms of India inflows. The second factor will be the chances of an economic recession and most economists still believe that it remains a distinct possibility. That is not great news for FPI flows. Finally, India has to retain its edge as the fastest growing large economy in the world. That edge is essential to ensure that FPIs continue to stay interested in the India investment story.