Relentless selling of the FIIs : Reasons and way ahead

The aggressive selling by the FIIs which is not showing any pause sign has made investors nervous. But one of the most important points investors should note is that while intermittent volatility impacts overall portfolio performance but

Relentless selling of the FIIs : Reasons and way ahead

One of the key factors causing sharp fall of the Indian equities from its record high in October 2021 has been relentless selling by the foreign institutional investors (FIIs). FIIs have been net sellers of domestic equities worth Rs 2.33 lakh crore in the nine-month period from October 2021 till June 2022. The current selling has been worse than the global financial crisis (GFC) of 2008 when the net selling of the domestic equities by FIIs stood at Rs 58,483 crore from January 2008 till March 2009.  Evidently, the equity market benchmark S&P BSE Sensex has fall 14% from its record highs on October 18, 2021 till June 30, 2022

The aggressive selling by the FIIs which is not showing any pause sign has made investors nervous. But one of the most important points investors should note is that while intermittent volatility impacts overall portfolio performance but they should stay calm and remain invested with focus on the long-term goals. Patience, courage and knowledge is crucial in equity market investing. And they can gauge the reasons behind massive selling by the foreign investors.

While one of the key reasons FIIs are pulling money out of India is attributed to discouraging global cues and expensive valuation of the Indian equities. We list down some of the vital ones prompting FII selling in recent times.

  • The gradually unwinding of the stimulus measures and tightening of the monetary policy stance of the global central banks including aggressive interest rate hike by the US Federal Reserve has sucked excess liquidity out of the system. This has prompted several investors to pull money out of the risky assets like emerging market equities including India and invest them in safe haven treasury bonds. Note the 10-year US bond yield has spiked from 1.5% on January 1, 2022 to 3.1% on July 8, 2022.
  • Rising inflationary pressure, higher crude oil prices, Russia-Ukraine war and recession worries added element of uncertainty in the economic environment across the globe resulted in profit booking by the foreign investors particularly with Indian market trading at premium valuation during 2021 market rally compared to other emerging markets. Note, the S&P BSE Sensex P/E ratio reached a record high of 36.21 times on February 15, 2021. The index is currently trading at P/E of 22.13 times as on July 8, 2022.
  • In addition to expensive Indian equities, fall of the Indian rupee to record low against the US dollar and concerns about widening of domestic current account deficit (CAD) owing to pressure from rising crude oil prices also resulted in FII outflows in the recent times.

Road ahead:

The massive FII outflows from the domestic equities have undoubtedly caused panic among investors and there is widespread debate on when they will return back. Although it is difficult to predict the return of the FIIs back into Indian equities; it is crucial to note below pointers and remain calm when the situation is jittery.

  • A large part of FII sell-off is owing to discouraging global cues and there return will largely govern by the global developments including pause in the Fed’s rate hike cycle. The growth story remains intact. The International Monetary Fund (IMF) forecasted India’s gross domestic product (GDP) at 8.9% while the global growth is expected to be 3.6% in 2022.
  • Strong presence of the domestic institutional investors (DIIs) led by mutual funds and insurance companies persists. Retail investors rising interest in equities by investing directly or via mutual funds also supported the local indices. The chart below depicts DIIs have been net buyers of equities worth Rs 2.97 lakh crore from October 2021 till June 2022. Had DIIs not participated so aggressively then the market fall would be much steeper than this.

Lastly, while the participation of the FIIs have been major drivers of the Indian equity market investors need not get panic with their selling as post 2021 rally some amount of profit taking was expected. Investors should avoid taking hasty investment decisions of selling investments in hurry or stopping the systematic investment in equity funds which could derail their long-term financial planning.  Next time if you get nervous about market volatility and FII selling remember the quote from Timber Hawkeye “You can’t calm the storm so stop trying. What you can do is calm yourself. The storm will pass”