Why Foreign Investors Are Leaving Indian Equities!

Why Foreign Investors Are Leaving Indian Equities!

This post explores the recent trend of Foreign Institutional Investor (FII) outflows from Indian equities and the reasons behind this trend

Strong Start to 2024 Overshadowed by Recent FII Selling

While record-breaking net FPI inflows of $41.6 billion were recorded in 2023-24, the highest since 2015-16 according to RBI data, the short term has witnessed a significant change in sentiment. Foreign investors have pulled out a substantial amount of money from the Indian markets so far in May 2024. As per provisional data from the National Stock Exchange (NSE), FII outflows stand at Rs 40,777.37 crore ($4.9 billion) – the worst performance among Asian markets. This follows a trend of FII selling throughout 2024, barring March. The table below details FII flows for the year so far.

Month Flows (Rs crore)
Jan-24 -35,977.87
Feb-24 -15,962.72
Mar-24 3,314.47
Apr-24 -35,692.19
May-24 (mtd) -40,777.37

Interestingly, this FII selling comes along with the negative performance by the Indian stock market. So far in May, both the Sensex and Nifty indices have delivered returns of 0.51% and 0.80%. This pales in comparison to the gains seen in other Asian markets like Hang Seng of 2.63% and 9.18% for TSE50 of Taiwan.

A Multi-Factored Sell-Off

The recent sell-off in Indian equities by FIIs can be attributed to a combination of factors. Firstly, the rise in US bond yields has made US bonds more appealing to FIIs compared to emerging markets like India. This shift in preference is driven by the perception of higher returns and lower risk associated with US Treasury notes. Additionally, uncertainty surrounding the upcoming Lok Sabha elections in India has heightened market volatility.

Markets participants are preferring to wait for election results before making significant investment decisions, thus contributing to the increased market turbulence, as evidenced by the India VIX index reaching a 52-week high. Moreover, the outperformance of Asian markets relative to India has diverted FII attention away from Indian equities. The allure of higher returns and greater stability in these markets has prompted FIIs to reallocate their investments.

Furthermore, the hawkish stance of the US Federal Reserve, characterized by maintaining high-interest rates to curb inflation, has exerted downward pressure on Indian stocks. The resultant appreciation of the US dollar has led to currency depreciation in emerging markets like India, exacerbating the sell-off.

Collectively, these factors are shaping the current trajectory of Indian equities.

Disclaimer: This post has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.