FPIs offload ₹28,242 crore in Indian equities, continue selling streak since April: What’s fueling the outflow?

FPIs offloaded ₹28,242 crore worth of Indian equities and the total outflow stands at ₹27,082 crore as of May 17, taking into account debt, hybrid, debt-VRR, and equities, according to National Securities Depository Ltd (NSDL) data. The total debt inflows stand at ₹178 crore so far this month.

Analysts noted that foreign investors will remain sellers in Indian markets given the delays in the interest rate cuts, inflationary concerns, moderation in corporate earnings, and premium valuation. The selling pressure on majority of indices has led to a rise in volatility index ‘India VIX’ in the past few sessions.

Also Read: MSCI May rejig to attract FII inflows worth $2 billion in India; Canara Bank, NHPC, Indus Towers among inclusions

Fund flow by FIIs and DIIs

Foreign institutional investors (FIIs) are on a selling spree in Indian markets and were sellers for five out six sessions last week with the total outflow recorded at ₹10,649.92 crore. Domestic institutional investors (DIIs) were net buyers for five out of six session, with a total investment of ₹14,410.18 crore, according to stock exchange data.

“An important trend in the institutional flows this month is the continuous selling by FIIs and the sustained buying by DIIs. But FIIs selling has declined recently and on Friday the 17th May, FIIs turned buyers…In the cash market FII selling stood at ₹35,532 crore through 17th May. FII cash market selling was almost matched by DII buying of ₹33,973 crore during this period,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

‘’The main trigger for the FII selling has been the outperformance of the Kong Kong index Hang Seng which shot up by 19.33 per cent during the last one month. FIIs are moving money from expensive markets like India to cheap markets like Hong Kong where the PE is around 10 compared to around 20 PE in India,” added the market expert.

Also Read: US inflation resumes downward trend, eases to 0.3% in April; core CPI cools for first time in 6 months

FPIs extend April’s selling streak: Key reasons behind the outflow

Broadly, market experts highlighted that the uncertainty over the outcome of Lok Sabha elections 2024, high US bond yields, soaring market valuations and ongoing geopolitical conflicts in the Middle-East.

“There are two main reasons why FPIs have been selling in FY2025. First, there’s uncertainty about the upcoming election. FPIs generally don’t like uncertainty; they prefer to play it safe and lock in the profits they made last year. Second, the market valuations are quite high,” said Sunil Damania, chief investment officer, MojoPMS.

Market analysts said that the US Federal Reserve’s decision indicates rate cuts much lower-than-expected earlier this year. The latest inflation data of April showed signs of easing, which is a positive indicator for the US central bank and has raised expectations of rate cuts in July or September, if inflation moves consistently towards the two per cent target level.

“This shift in FPIs’ behavior is not a random occurrence. It is a direct response to the ongoing geopolitical crisis in the Middle East, relative valuation discomfort, and the strength of US bond yields. These factors have prompted FPIs to swiftly withdraw funds from their portfolios, a move that significantly impacts the Indian equities market,” said Vipul Bhowar, Director, Listed Investments, Waterfield Advisors.

When will FPI inflows resume?

Analysts noted that the recent spike in the fear gauge VIX indicates a high level of uncertainty in the market. According to Vipul Bhowar, India VIX is not just any other metric. It is a pivotal instrument that mirrors investor sentiment and anticipated market volatility. Its inverse correlation with the Nifty 50 is a significant aspect to ponder. Historically, surges in VIX have coincided with major market events, such as election outcomes, underscoring its relevance.

While the recent VIX surge may evoke memories of previous pre-election anxieties, its current trajectory sets it apart. The VIX behaviour during elections is comparable to other significant occurrences. It often demonstrates a trend of escalating volatility as the event draws near, indicating heightened uncertainty and apprehension among investors. This aligns with historical patterns, where the VIX rises before major events.

Also Read: Stock market crash: Why are FIIs selling Indian equities aggressively? Are Lok Sabha elections to be blamed?

‘’We anticipate the market remaining volatile after June 4th. Once the election concludes, all eyes will be on the July budget announcement, triggering more speculation and potential market swings. ’The high market valuations could act as a barrier to significant market gains, but there’s also a possibility of a downturn,” said MojoPMS’ Sunil Damania.

So far for CY2024, while the equity market has witnessed FPI outflows of ₹26,019 crore, the debt market has witnessed inflows of ₹45,086 crore. The FPI strategy is to sell India which is expensive and buy China which is very cheap mainly through Hong Kong. The price to earnings (PE) ratio in India is more than double the PE ratio in Hong Kong. 

‘’So long as this ‘Sell India, Buy China’ trade sustains FII selling will weigh on the markets. The situation can change dramatically when clarity emerges on the election outcome…Going forward, there is likely to be a dramatic change in FPI equity flows in response to election results. Political stability will attract huge inflows,” said Dr. V K Vijayakumar.

FPI activity in Indian markets

In the first week of May, FPIs snapped their April’s selling streak and turned net buyers in Indian equities, however, sell-off continued in debt market. FPIs offloaded ₹8,671 crore in Indian equities last month and ₹10,949 crore in debt markets over high US bond yields. However, they pumped ₹35,098 crore in Indian equities during March 2024 – the highest inflows recorded in the first three months of 2024. FPI outflow initially declined in February 2024 until they were net buyers by the end of the month, despite high US bond yields.

The inflow into Indian equities stood at ₹1,539 crore in February 2024 and the debt market investment rose to ₹22,419 crore during the month on top of the ₹19,836 crore bought in January. The inclusion of government bonds to JPMorgan and Bloomberg debt indices had especially triggered foreign fund inflows into debt markets. FPIs turned massive sellers in January 2024 snapping their buying streak as investments saw a sharp uptick in December 2023 after they reversed their three-month selling streak in November 2023.

However, inflow intensified in December on strong global cues after the US Federal Reserve signalled the end of its tightening cycle and raised expectations of a rate cut in March 2024. This led to a crash in US bond yields and triggered foreign fund inflows into emerging markets like India.

For the entire calendar year 2023, FPIs bought ₹1.71 lakh crore in Indian equities and the total inflow stands at ₹2.37 lakh crore taking into account debt, hybrid, debt-VRR, and equities, according to NSDL data. FPIs’ net investment in Indian debt market stands at ₹68,663 crore during 2023.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 18 May 2024, 06:54 PM IST