Are Foreign Institutional Investors poised to make a comeback? Analyst decodes

By Yesha Shah, Head of Equity Research, Samco Securities.

Bulls tightened their grip on the Indian markets in this truncated week. Though it seems that markets are reclaiming lost grounds, FIIs have continued with their selling, albeit at a slower pace.

According to NSDL data, FIIs have now been net sellers in the Indian equities market for more than 5 months in a row. Such a selling spree was previously observed during the 2008 global financial crisis, when FIIs were net sellers for about 7 months.

See Zee Business Live TV Streaming Below:

In fact, FIIs have withdrawn funds amounting to around Rs 2.75 lakh crore in the equity cash segment since the start of the current fiscal, which is substantially higher than the cumulative money poured in post the pandemic i.e. between May’20 and Mar’21.

Certainly, our markets have become relatively resilient due to the unwavering confidence of domestic investors who have been relentlessly absorbing the intense sell-off of foreign investors.

To support this, in the last 6 months, banks, financial services and IT sectors saw the highest FII selling in absolute terms. Despite this, the Nifty Bank and Nifty IT slid only 3.66% and 0.01% in the last 6 months, respectively.

The major factors which provoked FII’s to dump their Indian investments were the expensive valuations of Indian companies and the anticipation of a taper tantrum 2.0. As the war began, this offload only intensified.

From where we are currently, the valuations of Indian markets have moderated, and geopolitical tensions are also subsiding. Fed's tapering of bond purchases is finally coming to an end, and with more clarity on the timeline for policy rate hikes, the extravagant volatility is also expected to abate.

Furthermore, given India's structural attractiveness among emerging markets and the possibility that some of Russian equity allocations in foreign portfolios will come to India, FIIs may be set to make a comeback sooner than later.

This, along with the already robust domestic participation can put bulls back in charge of markets.

Event of the week

The US Fed announced a 0.25% increase in its benchmark policy rate for the first time in three years to combat the worst inflation since the 1970s. It also predicted that its policy rate would be between 1.75% and 2% by the year end, rising to around 2.8% in 2023, the highest level since March 2008.

The Fed is hoping that this rate hike will keep inflation in check without sending the economy into a tailspin. While markets around the world are ecstatic that the Fed's decision removed uncertainty, the measures announced could have a significant impact on the RBI ahead of the MPC meeting in early April.

Unlike the Fed, the RBI has been unexpectedly dovish thus far. Furthermore, domestic retail inflation has not yet materially breached the RBI's comfort zone, which can be attributed in part to the fact that rising commodity prices have not yet been fully passed on.

Given the changing inflation-demand dynamics and the war's spillover effects, all eyes are now on whether the RBI joins the chorus and modifies its stance in April.

Technical Outlook

Nifty50 index closed on a bullish note for the second consecutive week, successfully sustaining above the crucial resistance of 16,800 as well as the 20 week EMA. Till Nifty does not close below 16,800, the bullish trend is likely to continue.

While almost all sectoral indices ended in the green, Nifty small-cap and midcap indices underperformed. Global indices also recovered, but if buying doesn’t emerge at higher levels globally, then the momentum of Indian indices may slow down as well.

With this backdrop, we suggest traders to maintain a bullish bias and initiate fresh long positions on dips only. Immediate support and resistance are now placed at 16,600 and 17,500 levels.

Expectations for the week

Considering that no major domestic event is lined up, Indian markets will be guided by their global counterparts in the coming week. The situation in Russia-Ukraine will be closely watched.

Because crude plays such a pivotal role in determining the fate of Indian macros, crude price movements will also be meticulously monitored. Furthermore, with increased allocations to ELSS funds as the end of the fiscal year approaches, DII's buying momentum is likely to continue.

In the absence of a positive trigger, market movements are expected to remain range-bound, and investors should continue to invest in selective, fundamentally resilient stocks. The Nifty50 closed this week at 17,287, up by 3.95%.