In a dramatic shift, foreign portfolio investors (FPIs) have turned net sellers in Indian markets during October, breaking their three-month buying streak. This reversal has emerged amidst rising geopolitical tensions, particularly related to conflicts in the Middle East. The abrupt change comes on the heels of a substantial uptick in FPI investments in September, fueled by a noteworthy 50 basis points (bps) interest rate cut from the US Federal Reserve, which had driven market sentiments to a nine-month high.
FPIs previously displayed remarkable resilience in the Indian markets, with continuous investments observed in June and July as pre-election uncertainties stabilized. However, this trend took a hit at the start of the fiscal year 2024-25 (FY25), leading to this month’s sell-off.
Notable Trends: FPIs invested ₹57,359 crore in Indian equities in September, marking the highest inflows year-to-date, significantly influenced by the US Federal Reserve’s pivot.
As of October 4, FPIs offloaded ₹27,142 crore in Indian equities, resulting in a net outflow of ₹23,101 crore when factoring in investments across debt, hybrid, and other financial securities, according to data from the National Securities Depository Ltd (NSDL). In contrast, the total investment in debt markets this month reached only ₹190 crore.
Reasons Behind the Sell-Off
Financial experts attribute this sell-off to heightened geopolitical tensions. While global equity markets have largely been stable, concerns about escalating conflicts could influence future market dynamics. Particularly, American markets have shown resilience, with a 21% year-to-date increase, despite some fluctuations in crude oil prices. Any significant military escalations, especially if Israel were to strike oil installations in Iran, could rapidly change the landscape.
Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, noted, “In a sudden U-turn in FPI strategy, foreign institutional investors (FIIs) sold ₹30,718 crore in equity during the first three trading days of October. The performance of Chinese stocks has significantly influenced this selling pressure.”
Market Impact: Novelties in the market, such as international concerns and domestic volatility, have contributed to recent fluctuations in stock prices.
Of particular note was a single-day sell-off on a Thursday, where outflows reached ₹15,243 crore, the largest in four years. There are rising concerns about funds reallocating back towards China, as Chinese authorities implement new policies designed to rejuvenate their economy and capital markets.
For instance, the Hang Seng index surged by 26% in just a month, and analysts predict this bullish trend will persist, contrasting sharply with the Indian market’s current stance.
Chinese Economic Stimulus: Recent measures undertaken by China, including a reduction in banks’ reserve requirement ratios (RRR) by 50 basis points, aim to unleash around one trillion yuan ($142.21 billion) for new lending. These aggressive stimulus strategies signal Beijing’s commitment to reinvigorating its economic landscape post-pandemic.
Future Outlook for FPIs
Given the restorative measures in China, along with the potential continuation of a buoyant Hang Seng market, investor behavior may shift significantly. If trends in Chinese stocks remain favorable, it could result in continued FII selling in India, particularly as domestic valuations appear under pressure.
“The momentum observed in Chinese stocks could perpetuate FII selling in India, where valuations seem high,” Dr. V K Vijayakumar commented, emphasizing the necessity for individuals planning to invest to become discerning in their choices. Long-term domestic investors may perceive the current environment as an opportunity to procure quality banking stocks now available at more attractive price points.
Experts maintain a cautious outlook, echoing concerns that the Indian market may overheat, leading to unsustainable valuation levels. However, the robust economic performance and strong fundamentals of Indian markets continue to provide a silver lining, offering potential for future growth.
Disclaimer: The insights provided are based on the views of various analysts and do not represent the perspective of Mint. We recommend consulting certified financial experts prior to making investment decisions, considering that market conditions can fluctuate rapidly and individual circumstances vary.
