As the festive season commenced, Indian stock market investors did not experience the anticipated joy. Instead, they witnessed a staggering decline of ₹11 trillion due to significant foreign investor outflows. This turbulence coincided with a robust rebound in Chinese stocks, spurred by recent monetary and fiscal stimulus measures, a rise in geopolitical tensions in West Asia, and inflated share valuations in the Indian market.
The turmoil in the Indian market was particularly pronounced during the weekly expiry of the Nifty, usually marked by volatility, as traders adjusted their positions.
The benchmark indices, Nifty and Sensex, marked their largest drop in two months, plummeting over 2%. Foreign institutional investors (FIIs) executed record sales in a single day, offloading shares worth ₹15,243.27 crore, as reported by BSE data. Additionally, FIIs sold derivatives contracts amounting to ₹10,635 crore on Thursday, intensifying the market’s downturn. Analysts forecast that market volatility may persist in the short term owing to ongoing FII outflows.
The Nifty dropped by 2.12%, concluding at 25,250.10 points, while the Sensex fell by 2.1% to 82,497.10 points.
Meanwhile, domestic institutional investors (DIIs) stepped in with a provisional purchase of ₹12,913.96 crore on Thursday, according to exchange data. However, this was insufficient to prevent the market from spiraling downward as FIIs liquidated substantial bullish derivatives positions, coupled with retail clients also selling off their holdings. Retail selling data is yet to be fully disclosed.
Investor sentiment turned jittery as reflected in the India Vix—a fear gauge—surging 9.86% to close at 13.17. This spike signifies growing uncertainty among investors, while a decline in the Vix typically suggests increased confidence.
Sector Performance Amidst Selling Pressure
Sector-wise, rate-sensitive industries suffered the most, with the Nifty Realty sector plummeting by 4.36%. The Nifty Auto index dipped by 2.88%, while the Nifty Private Bank and Bank Nifty experienced falls of 2.61% and 2%, respectively.
Major Contributors to Market Decline
Among individual stocks, the most significant detractors for the Nifty included Reliance Industries Ltd, which alone shed 87.37 points. Other notable losers were HDFC Bank Ltd (-76.36), Larsen & Toubro Ltd (-38.8), Axis Bank Ltd (-30.88), and ICICI Bank Ltd (-25.97). Collectively, these five companies accounted for almost 50% of Nifty’s total decline of 547 points.
Impact of ‘Hot Money’
While a segment of investments made by foreign portfolio and institutional investors (FPIs and FIIs) is strategically long-term and stable, short-term flows, termed as ‘hot money’, can shift abruptly, posing challenges to market stability.
Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities, pointed out that a portion of the stock market outflows can be attributed to hot money retreating to China. Recent activities have indicated that outflows, especially from the secondary market, surged in the past couple of days. Analysts like Andrew Holland, chief executive of Avendus Capital Public Markets Alternate Strategies, noted that China’s robust stimulus plan, aimed at averting an economic slowdown, has drawn investor capital from emerging markets like India.
Geopolitical Concerns and Economic Implications
In addition to these market dynamics, rising crude prices could translate to inflationary pressures in India, adversely affecting the rupee’s value and diminishing dollar returns for foreign investors. Trends indicate that hot money outflows from India to China could persist in the short term; however, domestic capital may counterbalance these sell-offs over time.
Amid escalating crude oil prices—having risen by 5% since Iranian missile strikes on Israel—analysts express concerns that the Reserve Bank of India (RBI) may prolong key policy interest rates rather than follow the U.S. Federal Reserve’s cue to lower rates to stimulate growth.
The RBI faces a challenging landscape. As geopolitical tensions rise, the likelihood of an interest rate cut by the RBI in December hinges on the impact of inflation influenced by any potential conflict escalation in West Asia.
Financial Overview: Net Outflows and Valuation Concerns
As of October, net foreign portfolio investor (FPI) outflows have totaled ₹11,635.42 crore. Despite recent investments in primary markets amounting to ₹3,395 crore, the overall sell-off highlights persistent caution among foreign investors. Data reveals that in the current calendar year, net FPI investment stands at ₹88,975 crore.
The upcoming Monetary Policy Committee (MPC) meeting scheduled for October 7-9 will be critical in shaping India’s monetary stance. Experts suggest that the committee may postpone a rate cut decision until it thoroughly assesses inflation levels, particularly in the backdrop of potential escalations in the Israel-Iran conflict.
Market and Derivatives Trends
Rohit Srivastava, founder of IndiaCharts, noted that the unwinding of long positions by FIIs significantly exacerbated Thursday’s market fall. On that day, FIIs reduced bullish positions in index futures and options, resulting in remarkable shifts in contracts. Data from the NSE indicates a net sale of ₹10,635 crore in index futures as FIIs adjusted their strategies in response to market conditions.
Valuation Pressures
The wave of foreign institutional selling also aligns with concerns over high valuations in Indian markets. The Nifty presently trades at a price-to-earnings multiple of 25.23, slightly over its historical average of 24.76. In contrast, broader indices like the Nifty Midcap 150 and Nifty Smallcap 250 exhibit price-to-earnings ratios of 47.5 and 35.9, respectively, starkly surpassing their historical averages.
