It is jitters for the market participants again as foreign institutional investors have been selling Indian equities in large numbers lately. It has witnessed one of the largest outflows of foreign capital since the COVID-19 pandemic started in October 2024, wherein FIIs have sold more than ₹80,000 crore worth of securities in the secondary market. Reasons for FII Sell-Off Some global and domestic factors that are inherently linked to each other are driving the FIIs to sell in Indian markets. Let’s see some key factors:
1. Geopolitical Uncertainty and Risk-Off Sentiment
The situation in the Middle East, which is continuing to be shaped by the developments in Israel-Hamas, continues to cast a cloud of uncertainty around the world. With such geopolitical crises, risk-off strategies come into play. It is when investors withdraw their investments from emerging markets like India and place them in safer resources such as gold or US treasuries. The same has happened with FIIs. They witnessed heavy equity outflow during the month of October.
2. FII Preference Shift: “Buy China, Sell India”
The third strong reason for the outflows in FIIs is that Chinese markets have regained their attractiveness now. The PRC’s economic easing policies newly started by its government provided all the right stimuli investors would like to see. FII’s realignment of funds towards Chinese stocks, seeing better valuations and opportunities for recoveries as compared with Indian markets. The trend has culminated into a “buy China, sell India” narrative that’s driving sizeable outflows from Indian equities.
3. Profit Booking from Overvalued Indian Stocks
Indian equities have seen a good run in early 2024 and the Nifty50 is up more than 14% for the year. However, many sectors, especially banking and technology, are now overvalued and FIIs indulge in profit booking· Indian stocks are trading at relatively higher valuations as compared to the rest of the emerging markets. One would, therefore, expect FII selling in a bid for profit-booking and waiting for better re-entry points.
4. Currency Risks and Global Interest Rates
The strength of the US Dollar and the probable rate hikes by the US Federal Reserve are some other factors that FIIs consider in order to make their decisions. A higher dollar weakens returns for foreign investors in rupee-denominated assets and, by extension, increases currency risk. The message of higher-for-longer interest rates from the US Fed would yet again make the otherwise riskier emerging market assets like Indian equities less appealing, as the US bond yields are fast becoming a more attractive proposition .
5. Effect on the Indian Market: Volatility and Corrections
The selling pressure from FIIs has already begun reflecting in Indian stock indices. The Nifty50 index has plunged by 3.7% in October, indicating the beginning of possible correction. If this continues, analysts warn market sentiment could remain bearish and downside risks are possible across all sectors. How Domestic Investors Are Reacting
While FIIs have been quite volatile in 2024, on the other hand, DIIs have been largely positive. DIIs have put over ₹4.1 lakh crore into Indian equities this year, which somewhat tempered the impact of FII outflows. However, the sustainability of this trend will depend on broader macroeconomic conditions and global financial stability.
Outlook for Indian Markets
All this said, geopolitical pressures may ease and growth of China becomes stabilized, which could initiate a return of FIIs to India. However, if the set of unbroken US rate hikes and currency fluctuations continue, this return might be dampened. Corporate earnings announcements by companies and budget announcements of the Indian Government would also be keenly watched by market participants for cues on the directions the market will take.
Conclusion
This huge selling by FIIs in the month of October 2024 is a perfect example of how the global markets are interlinked. While geopolitical uncertainty, profit booking, and currency risk is driving this sell-off, DIIs’ resilience somewhat seems promising for the short term. Global economic developments along with policy responses will go a long way to see if Indian equities are here to recover or witness more corrections.
