FII inflows into the Indian equities remain highly choppy, with buying in just 3 sessions out of the 20 sessions in November month. And the foreign insitutional investors (FII) inflow and outflow has become integral as already the continuing and relentless FII outflow since late September has already led to a steep correction of around 8 per cent or 2000 points.

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Also, the continuing FII exodus has also weighed on the domestic unit rupee which plunged to a record low of 84.74 per US dollar in trade on December 2, 2024. Nevertheless, it closed near the day's low at 84.71, down 0.17 per cent.

So, as FII trajectory going forward will remain a key factor giving direction to the headline indices, here is what analysts expect the trend to be likely going forward:

G. Chokkalingam, Founder-Equinomics held that though the outlook for the overall markets looks robust in the medium to long-term, we believe that the FPIs / FIIs may continue to sell Indian equities in the short-term as the outlook for the US economy and US dollar remain robust. We also expect Mr. Trump to keep proposing more and more protectionism measures which would favour the US economy and US dollar and hence, the US equity markets in the short-term.

Atul Parakh, CEO of Bigul on the likely outlook for FIIs highlighted that the Foreign Institutional Investor (FII) landscape for December appears nuanced, with potential for a comeback in January.

Making note of the relentless sell-off by FIIs, Trivesh, D, COO of Tradejini said on a year-to-date (YTD) basis, FIIs continue to be net sellers. This pattern highlights the impact of global factors, including concerns over challenges to the US dollar’s dominance, high U.S. bond yields, and a strong dollar, which he feels is keeping FIIs cautious. Additionally, Japan’s government finalising an approximately Rs 7.64 lakh crore supplementary budget adds another layer to FIIs interest.

Why FIIs are emerging as constant seller in Indian equities?

Parakh noted that the current outflows are driven by multiple factors, including the anticipation of US market opportunities, rising US interest rates, and year-end profit booking. The US market's attractiveness, particularly with expected policy shifts and manufacturing sector revival, has temporarily diverted investment flows. Additionally, India's current market valuation and underwhelming earnings season have contributed to the pullback.

When will FIIs to likely make a comeback in a big way?

Chokkalingam sees FII inflows to make a comeback by the end of FY25. This belief he premises on the following pointers:

  • By March 2025, interest rate cycle would start reversing in India in a big way. Same will boost market prospects.
  • Secondly second half of FY2025 would do better on GDP growth due to better performance by agri sector and even the manufacturing sector as compared to first half.
  • Also, as and when Trump assumes power, India may be relatively favoured in global trades, he believes.
  • There is a limit to protectionism- already there is fear  that cost of living for US citizens will go up due to steep hike in tariffs on imports. Once this fact is well established optimism will reemerge on emerging markets including India and FII inflows will follow.

Nevertheless, key catalysts suggest a potential FII return in early 2024: the upcoming October-November-December earnings season, expectations of government capex spending, and the anticipated budget on February 1st are likely to improve market sentiment and potentially reverse the current trend, adds Parakh. 

The uptick in stock futures buying might indicate selective opportunities, but with ongoing global uncertainties and domestic political stability in focus, FII sentiment remains conservative believes Trivesh.

Whether this cautious optimism translates into sustained inflows, I think, will depend on favourable macroeconomic conditions and reduced global volatility, he added.

Likely impact of continuing FII outflow 

Since FIIs are largely invested in the large cap segment, we expect large cap stocks to remain under pressures, added Chokkalingam.