In October 2023, foreign institutional investors (FIIs) have experienced one of their most significant selling sprees in the Indian equity market in recent years. As global markets react to a rally in Chinese stocks and geopolitical tensions in the Middle East, these investors have net sold shares valued at an astonishing ₹58,711 crore as of October 11. This represents the second-largest outflow since the colossal net sale of ₹61,973 crore recorded in March 2020, which coincided with the onset of the COVID-19 pandemic.
The current trend underscores a reactionary strategy among FIIs, particularly in light of rising valuation concerns within the domestic market. While the benchmark Shanghai Composite Index surged by 18.4% following substantial economic stimulus measures in China, the Nifty 50 index plummeted by 3.8% during the same period. This divergence illustrates a broader shift in investor sentiment towards perceived opportunities in China, particularly as domestic valuations become increasingly elevated.
As we proceed further into the month, market analysts will closely monitor FII behavior, especially in the context of upcoming Initial Public Offerings (IPOs). Notably, the eagerly anticipated IPO from Hyundai Motor India, set to open on October 15, with a remarkable target of ₹27,870.16 crore, will be a focal point for institutional investment strategy. Market veterans suggest that subscription levels from institutional investors will be critical indicators of FIIs’ overall market stance.
R Venkataraman, Chairman of IIFL Securities, commented on the heavy FII selling, citing geopolitical instability in the Middle East and bullish trends in Chinese assets contributing to this shift. “The market landscape is evolving rapidly, and it will be fascinating to see how FIIs respond, especially with the largest IPO in Indian history about to launch,” he remarked.
The backdrop of FII activity also includes significant domestic buying by domestic institutional investors (DIIs), who have counterbalanced some of the FII outflows by acquiring shares worth ₹57,792.2 crore this month, according to data from the Bombay Stock Exchange (BSE). However, recent derivatives liquidation by foreign investors has played a substantial role in pulling down the Nifty index.
According to Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies, the disparity in investment dynamics is heavily influenced by China’s recent fiscal measures and its comparably lower valuations. While he acknowledges that the long-term narrative for India remains attractive to global investors, the immediate landscape is marred by uncertainties arising from geopolitical tensions and the pressure to deliver robust results in the upcoming Q2FY25 financial season.
Current Trends in Secondary Market Activity
The trend of FII selling is not limited to a single month but reflects a broader pattern in India’s secondary markets. Data from the National Stock Exchange (NSE) indicates that in four of the last five fiscal years leading up to August 2024, FIIs have been net sellers of equities. Their selling patterns have raised concerns, especially considering that the NSE holds a 93% share of the cash market.
In recent years, the behavior of FIIs has exhibited considerable volatility, with notable shifts in purchasing and selling patterns. For instance, after net buying ₹1.29 trillion in FY21, the net sales in subsequent years reached alarming figures: ₹2.83 trillion, ₹2.28 trillion, and smaller amounts in FY24 and FY25 to date.
Further elaborating on the source of capital inflows, NSDL data reveals contrasting trends in the primary market. Investments in the primary market and other avenues surged to inflows of ₹2.74 trillion in FY21 but shifted towards significant outflows in FY22. Yet, the subsequent fiscal years have shown signs of recovery, with ₹2.08 trillion inflow in FY24 and ₹31,993 crore inflow as of August in the ongoing fiscal year, FY25.
