Foreign Institutional Investors Remain Net Sellers in Indian Equities YTD: Future Outlook

Foreign Institutional Investors (FIIs) have been consistently pulling out from Indian equities, showing a highly unpredictable inflow pattern. In the month of November, buying activity occurred in only three out of twenty trading sessions. This continuous outflow, which began in late September, has contributed to a significant market correction of approximately 8 percent, equating to a loss of around 2000 points.

Moreover, the sustained selling by FIIs has negatively impacted the Indian rupee, which fell to a record low of 84.74 against the US dollar on December 2, 2024. The rupee closed the day at 84.71, marking a decline of 0.17 percent.

Looking ahead, the trajectory of FII movements will be crucial in determining the direction of major market indices. Analysts discuss potential trends based on current circumstances.

G. Chokkalingam, the Founder of Equinomics, stated that although the medium to long-term outlook for the markets appears promising, they anticipate continued short-term sales by FIIs. This skepticism is influenced by strong prospects for the US economy and the US dollar. Chokkalingam believes that increasing protectionist measures, likely to be proposed by former President Donald Trump, may enhance the attractiveness of the US economy and stock markets in the near term.

Atul Parakh, CEO of Bigul, shared insights regarding the FII situation in December, indicating that while the landscape looks mixed, there might be potential for a rebound in January.

Highlighting the ongoing sell-off, Trivesh, COO of Tradejini, pointed out that on a year-to-date (YTD) basis, FIIs are still net sellers. He credits global factors for this trend, including concerns about the US dollar's dominance, elevated US bond yields, and a solid dollar, which are making FIIs cautious. Additionally, Japan’s announcement of a supplementary budget worth about Rs 7.64 lakh crore adds another dimension to the interest of FIIs.

Reasons Behind Persistent FII Selling in Indian Equities

Parakh noted that multiple factors are driving the current outflows. These include the lure of US market investment opportunities, rising interest rates in the US, and profit booking as the year-end approaches. The US market's current appeal, especially with anticipated policy changes and a revival in the manufacturing sector, has temporarily redirected funds away from India. Furthermore, the Indian stock market's valuations and a lackluster earnings season have also contributed to this pullback.

Prospects for a FII Comeback

Chokkalingam predicts that FII inflows could rebound by the close of the fiscal year 2025 based on several indicators:

• By March 2025, a significant reversal in India's interest rate cycle is expected, which should enhance market sentiment.
• The second half of FY2025 is anticipated to show improved GDP growth, driven by stronger performance in agriculture and manufacturing compared to the first half.
• Should Trump return to power, India may gain relative favor in global trade, which could attract FII interest.
• Restrictions on protectionism may emerge, particularly as rising tariffs could lead to an increased cost of living for US citizens. This realization could foster a renewed optimism towards emerging markets like India, paving the way for FII inflows.

In the short term, crucial catalysts suggest potential FII re-entry in early 2024. The upcoming October-November-December earnings announcement, expectations of government capital expenditure, and the budget announcement slated for February 1 are likely to uplift market sentiment and potentially reverse the current trend, according to Parakh.

Moreover, while recent upticks in stock futures buying indicate possible selective opportunities, ongoing global uncertainties and the need for domestic political stability mean that FII sentiment remains conservative, as highlighted by Trivesh.

Whether this cautious optimism transforms into sustained investment will depend on favorable macroeconomic conditions and reduced global volatility, he stated.

Consequences of Ongoing FII Outflow

Given that FIIs primarily invest in large-cap stocks, a continued outflow is likely to keep pressure on the large-cap segment of the market, according to Chokkalingam.

FII, Equities, Investment