Have you ever noticed how a hurrying marketplace thrives on a variety of vendors? It’s the same with a nation’s economy! For countries like India, on its exciting journey of growth, there’s a special kind of investor playing a crucial role: The Foreign Institutional Investors (FII). Imagine them as energetic international shoppers, bringing in a fresh wave of funds to Indian companies. Their investments are like a sixer, fueling businesses and propelling the stock market forward.  

FIIs act like a bridge connecting India’s potential with global capital markets. They bring in much-needed funds for companies to innovate, expand and create jobs. This not only benefits the businesses themselves but also ripples through the entire economy, fostering progress and development. It’s like adding more vibrant colors and exciting products to the marketplace, making everything more dynamic.  

However, just like any marketplace, things can get interesting when the buying and selling pattern differs. Recently there has been a trend, wherein FIIs are pulling back their investments, and selling their shares in Indian companies. This can be due to various reasons like global economic concerns or shifts in investment strategies. It may also look like some of the international shoppers are holding off on their purchases for a while. 

Come let’s try to understand what are the reasons for selling shares in the Indian market. 

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But before that let’s have a look at the FIIs investment made in India for the past five years. 

YearsAmount (in crores)
2020170260.39
202125750.2
2022-121439.44
2023171106.89
2024-23193.2

Election Dramas and the Change in India VIX

During the period of Lok Sabha election results, the India VIX (Volatility Index) surged to a fresh 52-week high. It reflected the increased nervousness on Dalal Street regarding the probable outcome of the Election. The heightened volatility has led to a significant sell-off by Foreign Institutional Investors (FIIs) in the Indian market. FIIs aggressively started selling Indian stocks, with a net outflow of Rs 1,800 crore per day since the beginning of the Lok Sabha elections.

This selling pressure is being reflected in the uncertainty surrounding the elections, which made FIIs cautious about taking any election-related risk at a time when the market is near an all-time high. Adding on this the market capitalization of all the listed stocks on the BSE which had already crossed the $5 trillion mark for the first time, led the FIIs to focus shift towards other markets like China. They saw that these markets are more undervalued compared to that of the Indian market. 

Holdings of FII during 2024 in crores

MonthsAmount
January-25743.55
February-1538.88
March35098.32
April-8671.27
May-25586.33
June170.75

High Valuations and Sector Underperformance which Disappointed FIIs 

Most of the FIIs sold Indian stocks due to high valuation concerns and sector-wise underperformance. The primary valuation concern was that Indian stocks run ahead of fundamentals, leading to high valuations. This was significantly evident in sectors like IT and financials, where FIIs had a major allocation. Due to high valuations, FIIs were cautious about investing in India, they perceived the market as overvalued compared to other emerging markets like China and Hong Kong.

By looking at the sector-wise underperformance the FIIs shifted their investment strategy. They sold their positions in these sectors and reallocated their capital to other markets that offered better opportunities. The Hang Seng Index in Hong Kong surged by 8% in the first half of May which triggered them to sell Indian stocks and buy Chinese stocks. This trend continued, with FIIs withdrawing a substantial Rs of 25586 crores from the Indian market in May, marking the largest monthly FII outflow since January 2024.

Difference in interest rate

The interest rate differentials refer to the difference between the actual interest rate existing in India compared to the interest rates in major developed economies, primarily the United States. Concerning the current rate hike cycle by central banks globally, India’s interest rates were significantly higher than rates in the U.S. and other developed markets. This made the debt instruments of India like the government bonds and corporate bonds relatively more attractive for foreign investors seeking higher yields. 

But, as the U.S. Federal Reserve and other major central banks started raising interest rates aggressively to combat inflation, the difference between the Indian interest rate and the other economies has narrowed down considerably. The repo rate in India currently stands at 6.5% while the federal funds rate in the U.S. stands in the range of 5-5.25%.

The gap between these rates has significantly reduced compared to the previous year. With narrowed interest rate differentials, the Indian debt instruments seem relatively less attractive for foreign investors like the FIIs. The shift in interest rate dynamics can make the FIIs earn comparable or higher yields in their home markets or other developed markets. This led FIIs to pull out funds from the Indian debt markets, as well as equity markets, as they reallocated their portfolios to take advantage of higher yields.

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Risk – Off Sentiment faced by the Indian market 

Geopolitical tensions

The intensified crisis in the Middle East, particularly the aerial attack by Iran on Israel, led to a sharp decline in the BSE Sensex and the benchmark Equity Index by almost 4%. This event increased risk aversion among investors and heightened uncertainty. The surge in global crude oil prices during this crisis also increased the borrowing costs and dampened the risk appetite. 

Rupee Volatility 

During the time of geopolitical tensions, inflation, recession fears and global economic trends the Indian rupee was highly volatile. This volatility made gold and silver more expensive in the domestic market, which potentially led to profit booking and increased liquidity among investors. 

These risks collectively contributed to a risk- off sentiment in the Indian market, leading to a decline in investor confidence, especially in FIIs and forcing them to shift towards safer assets. 

Stocks which saw highest FII sell out

CompaniesDecember 2023March 2024Change in FII holding by %
Zee Entertainment Enterprise Ltd28.19%19.189.01%
Aster DM Healthcare Ltd41.00%33.48%7.52%
Route Mobile Ltd21.59%15.83%5.76%
Gujarat State Fertilizers and Chemicals Ltd19.82%14.12%5.70%
Au Small Finance Bank Ltd39.37%35.47%5.66%
Kalyan Jewellers India Ltd26.21%21.10%5.11%
PVR INOX Ltd21.83%16.80%5.03%
Jubilant Foodworks Ltd27.75%23.24%4.51%
HDFC Bank Ltd52.31%47.83%4.46%
Star Health and Allied Insurance Company Ltd31.01%26.57%4.44%

Conclusion

The recent FII selling in India’s stock market has undoubtedly raised eyebrows. While their investments are a valuable source of capital, we have to remember that FIIs are, by nature, responsive to global market conditions. Their decisions are often driven by factors beyond India’s control, like interest rate hikes in other countries or economic slowdowns in major economies. 

This also doesn’t necessarily mean they’re losing faith in India’s long-term story. India’s strong economic fundamentals, large and young domestic market and growing middle class remain attractive to foreign investors. It’s more likely that FIIs are currently trying to rebalance their portfolios or seeking better returns elsewhere.

The current FII selling can create short-term volatility, but the long-term outlook for India’s economy remains positive. The story of FII involvement in India’s growth might see some adjustments for some time, but the overall narrative investments are likely to continue.  What would you say about the FII’s future investments in India? Do let us know in the comments below.

Written by Pavunkumar V M 

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