Rs 4 lakh crore gone in 15 months! 3 factors why FIIs are reluctant to buy Indian stocks

 FPIs have sold Rs 4.1 lakh crore over the last 15 months in the CM (cash market) segment in primary markets. This time, the pace and amount is much higher than what it was in 2008, which is hurting the Indian market. Since the real tightening cycle is coming back after decades of a low interest rate era, global investors seem to be considering a new asset allocation strategy,” 

On the other hand, domestic investors have bought stocks worth about Rs 3.3 lakh crore in the last 15 months and have absorbed more than 80 per cent of foreigners’ selling so far. The average monthly SIP flow is Rs 12,100 crore this quarter. 5 years ago, this average monthly flow was only Rs 3,700 crore.

ICICI Securities said the large-scale outflows from Indian equities by FPIs have largely been driven by the fear of aggressive quantitative tightening by the US central bank to tame inflation and relatively higher valuations of Indian equities.

But valuations have rationalised significantly from October 2021 levels and the fear of a structural increase in inflation is reducing as global commodity prices decline over the recent past which should build the confidence in slowing down of FPI outflows incrementally, it said.

"Risk still remains in terms of elevated CPI inflation and crude oil prices which are yet to climb down meaningfully from their recent peaks," the brokerage added.

Analysts in an ETMarkets Midyear Survey said they do not expect the situation to improve, as they believe it would take time for the risk appetite to come back.

An old adage goes as: When the US sneezes, the world catches a cold. Analysts said the US recession will have a contagion effect on other economies. Historically, whenever the commodity prices have been elevated, more likely than not, recessions have occurred, said Yesha Shah, Head of Equity Research, Samco Securities.

"This is also the reason why globally, the selloff has continued. In many of the previous deep market corrections and recessions, markets stopped falling when the Fed intervened and loosened the monetary policy. This does not seem likely now, given that interest rates are lower than inflation rates. So should a recession occur, it can become challenging for equity markets to hold their ground," Shah said.