FII selling continues for record continuous 37 days: Will they make a comeback any sooner?

After the 'Sell India buy China' strategy amid the China stimulus news, the Indian equities continued to face foregin institutionak investors (FIIs) exodus. The outflow though has lessened after October's FII outflow of Rs 1,14,445 crore, it stands at Rs 39,668.98 crore so far in November 2024.

Shivani Nyati, Head of Wealth at Swastika Investmart on the factors resulting in the outflow by FIIs said:

Several factors are driving this trend. Firstly, there has been a shift of funds from India to China. Secondly, the combination of perceived safety and growth opportunities in the US market, along with rising US bond yields and a strengthening dollar index, has influenced investor decisions. Additionally, earnings disappointments from India Inc. have added to the negative sentiment.

What the FII sell-off has resulted in?

As per analysts the impact is not that crucial as the recent exodus by FIIs in Indian equities is only a per cent of their total holding in Indian equities and hence the structural impact remains limited.

Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities highlighted that, "FPIs are selling equities as their cost of trading has surged on account of rising US Bond yields. This is despite the US Federal Reserve decided to cut down the interest rate aggressively by 75 basis points in last three months. The US10-year Bond yield has risen from 3.6 per cent in September to 4.395 per cent as on November 22, 2024. This has resulted in higher cost of capital for the FPIs operating in Emerging markets."

In addition to this, the uncertainty over further US rate cuts is becoming intriguing. Earlier this year, it was expected that there will be a total of 300 basis points (3 per cent) cut during 2024. However, till now, there are only two rate cuts announced of 75 bps. There’s an uncertainty whether the December cut of 25 bps will happen or not?, noted Sheth.

The Oil & Gas sector saw the largest outflow, for 2nd time in a row with ₹7,214 crore being withdrawn by FPIs, reflecting a bearish sentiment. In contrast, the Information Technology sector recorded the highest inflow, attracting Rs 3,087 crore.

Atul Parakh, CEO of Bigul said, "The current selling pressure, which has triggered an 8-9 per cent correction in benchmark indices, is primarily driven by rotation towards Chinese markets and disappointing Q2FY25 earnings where growth estimates have been revised downward from 12% to 6 per cent."

However, India's market resilience is underpinned by its 83 per cent domestic ownership - the highest among emerging markets - and robust retail participation evidenced by record-high SIP inflows of Rs 25,300 crore in October 2024. The selling intensity has moderated in November's second week to Rs 2,500 crore from Rs 20,000 crore in the first week, suggesting potential exhaustion of the selling trend.

Outlook for FII trend as deciphered by experts 

While near-term flows may stabilize as we approach the traditional year-end rally period, the outlook remains contingent on earnings recovery and global risk sentiment, warranting a balanced investment approach with opportunities to increase allocation on market corrections, added Parakh.

Sheth, however on a cautious note, said till the FPIs settles down with the developments in the US and the US Bond yields settles under market affordable range, their (selling) activity is expected to remain hyper and the fate of emerging markets including that of Indian markets will hinge on it

Conversely Nyati added that The recent news surrounding the Adani Group may create short-term panic among investors, potentially leading to a panic bottom in the market. However, it is important to note that the actions of a single group are unlikely to alter the long-term bullish outlook of FIIs towards India.

I believe FIIs are likely to return to the Indian equity market after a meaningful price correction, as the broader growth story of India remains intact, the expert noted.