Daily FII outflow at worst in seven months; can investors expect more pain ahead?

Is there more pain on the cards for Dalal Street bulls? Foreign institutional investors net sold Indian shares worth Rs 5,977.9 crore on Friday — the biggest in a day since June 17, 2022, according to provisional exchange data, though domestic institutional investors continued to support Dalal Street, with net purchases to the tune of Rs 4,252 crore.

As of January 27, FIIs have net offloaded Indian stocks worth Rs 11,354.4 crore in five back-to-back sessions of selling, their second longest and heaviest selling spree of so far in 2023. 

During a 17-session period that ended on January 16, FIIs took out a total of Rs 24,638.1 crore in stocks, according to the data. 

Many experts are skeptical of a significant comeback by FIIs anytime soon.

Market veteran Ajay Bagga believes the largest single-day selling in seven months is confirmation of the possibility of more outflows for the Indian stock market up ahead. 

Bagga does not expect FIIs to switch to sustained buying anytime soon, he told Zeebiz.com.

Foreign institutional investors have only intermittently net purchased Indian shares over the past few weeks. In January 2023 so far, FIIs have emerged net buyers only on two days: January 17 (Rs 211.1 crore) and January 19 (Rs 400 crore).

In the previous month, they had emerged net purchasers on give days in total: December 2 (Rs 214.8 crore), December 13-14 (Rs 992.1 crore), December 20 (Rs 455.9 crore) and December 22 (Rs 928.6 crore).  

It is persistent buying buy FIIs in 2021 that aided the benchmark indices' rise to a chain of unprecedented heights — part of a one-way rally that lasted some 18 months. 

AK Prabhakar, Head of Research at IDBI Capital Markets, has a wait-and-watch approach on the current trend of FII flow. "Will wait till Budget. How soon or whether at all FIIs return to Indian shares depends on government focus and policy," he told Zeebiz.com. 

The market is afraid the finance minister can tinker with tax on long-term capital gains (LTCG)... If that happens, it can be a negative for the market, and a status quo will be very positive," he said. 

Editor's Take

Earlier this mmonth, Zee Business Managing Editor Anil Singhvi said that concerns about foreign fund outflows remain among investors on Dalal Street. (Read more on what Anil Singhvi said)

Are FIIs finding China more attractive?

"The basic reason for this sustained selling is that other markets like China, Hong Kong, South Korea and Taiwan are cheaper compared to India. There has been selling in India and buying in cheaper markets," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. However, valuations in India are slowly becoming attractive, he added.

"The prospects for growth and corporate earnings are much better in India compared to other economies. This will persuade FIIs to buy in India. But they will buy only after the dust settles on the Adani crisis front and Budget proposals are known," he told Zeebiz.com. 

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January is on track to be a second straight month of monthly FII outflow for Dalal Street.

In December, they withdrew shares worth Rs 22,546.3 crore, and made net buys of Rs 14,231.1 crore in the previous month. 

Before November 2022, the only other monthly net FII inflow for the Indian market was seen in August.