Can August FPI flows again create magic?

FPI flows into India slow in August

The first signs of a slowdown in FPI flows were already there in the last 2 weeks. In the first 2 weeks of August 2023, the FPI flows into India have suddenly turned tepid. For instance, the total FPI flows into India in the first half of August is just Rs737.16 crore, with half of that coming from the secondary markets and the balance from the primary markets. This is in contrast to the over $5 billion of FPI flows that came in each month in May, June, and July 2023. However, debt inflows were a lot more robust in August, although, that is hardly sufficient to compensate for the tepid equity flows in the month. 

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

There is a positive to the table above. Since March 2023, the FPIs have been net buyers in equities in each of the last 5 months and half month of August. The net result is that the massive FPI selling that we saw in the calendar year 2022 has been fully offset in the first 8 months of 2023. However, FPIs started selling in India since October 2021, so there is 3 more months of selling that has to be offset and it remains to be seen if that can be achieved in terms of FPI flows in the remaining months of calendar year 2023. For now, let us move to the more immediate issue of what is hampering FPI flows in August after they infused a combined $17 billion into India between May and July 2023?

FPIs have short term concerns on Indian equities

There were several reason for the overall FPI flows into India slowing in August 2023. Here are some of the key reasons for the same. 

• The biggest reason for the FPI flows tapering in August was the decision by Fitch to downgrade the US debt by a notch from AAA to AA+. Analysts, economists, and policy makers have criticized the wisdom of the move, but the impact has been more pronounced on EMs like India. After all, when you see risk-off flows, it is the emerging markets like India that get impacted the most. 
  
   
• The downgrade by Fitch was followed by a downgrade of a different form by Moody’s, another of the big-3 rating agencies. Moody’s did not downgrade the US debt rating, but instead downgraded the US banks, which was bad enough. That had a collateral impact on the Bank Nifty which anyways has a substantial weightage in the Nifty. That also impacted FPI flows since the banks and financials had accounted for 35% of the FPI flows between May and July i.e., $6 billion out of $17 billion went into financials. One can imagine the impact it would have on FPI flows into India. 
  
   
• The third reason for weak FPI flows is more technical in nature. In the last few weeks, the Nifty has struggled to cross above the 20,000 mark. In fact, the intermediate resistance level of Nifty has been getting progressively lower. First, the Nifty struggled at 20,000, then at 19,800 and then at 19,500. This persistent lower resistance has also dented the enthusiasm of FPIs to a large extent. This has also raised concerns over relative valuations of India versus rest of Asia.
  
   
• Finally, there is the major concern over inflation, that has now spiked from 4.25% for May 2023 to 7.44% in July 2023. This puts the RBI in a dilemma as hiking rates would add to cost of funds for Indian companies, while status quo would mean real rates are at a disadvantage in India. Either ways, FPIs would prefer to enter Indian markets once there is clarity on this issue.

The good news is that the short term may be a little difficult, but the long term still looks promising. Here is what we take away from the long term story of FPI flows into India. 

Longer term perspective on FPI flows is still encouraging

While the short term concerns cannot be wished away, the long term still looks promising for FPI flows into India. Here is why.

• For most FPIs, India is one of the few emerging economies that offers a strong domestic oriented consumer market. Flows may gravitate towards India-centric companies.
  
   
• The India story is all about the big leap in size of the economy. GDP moving from $3.5 trillion to $5 trillion in next 5-6 years is a huge market and potential opened up. 
  
   
• The surge in GDP will be accompanied by per capita income rising from $2,400 to $4,000 in next 5 years. That is a lot of purchasing power and consumption potential unleased. 
  
   
• Despite upcoming elections, FPIs are convinced that policy stance and the reforms process is largely on track. Flows should remain positive in the medium term. 

While Fitch and Moody’s downgrades will be concerns, there is enough steam in India consumption and India infrastructure to sustain FPI flows in the future.

How will FPIs place their bets on India in coming weeks?

Here are some of the key points that will drive FPI flows into India in the coming months. Firstly, the CME Fedwatch will be closely tracked. Fed still remains hawkish and till that time, the FPIs are likely to be cautious on India flows. Secondly, the rating downgrade by Fitch and Moody’s will continue to be an overhang, especially for risk-off flows. That remains a concern since India is at the lowest level of Investment Grade. Thirdly, the results season has seen decent profit growth but pressure on top line. The global slowdown in demand is clearly showing and that will be a key factor. Lastly, global oil prices and Indian rupee will be the key macros. The spike in Brent has made the rupee vulnerable and that is likely to impact FPI dollar returns. The outlook is positive, but immediate concerns remain!