Daily FII outflow at worst in seven months; can investors expect more pain ahead?

Is there more pain on the cards for Dalal Street bulls? Foreign institutional investors net sold Indian shares worth Rs 5,977.9 crore on Friday — the biggest in a day since June 17, 2022, according to provisional exchange data, though domestic institutional investors continued to support Dalal Street, with net purchases to the tune of Rs 4,252 crore.

As of January 27, FIIs have net offloaded Indian stocks worth Rs 11,354.4 crore in five back-to-back sessions of selling, their second longest and heaviest selling spree of so far in 2023. 

During a 17-session period that ended on January 16, FIIs took out a total of Rs 24,638.1 crore in stocks, according to the data. 

 FIIs have been net sellers to the tune of ₹ 381 billion (bn) since the start of the year?

And this came on the back of ₹ 1,214 trillion (tn) of net sales in the year 2022.

That's right! FIIs are on a selling spree. They are dumping Indian stocks.

In fact, they have been unenthusiastic about India for quite a while now. In the boom year of 2021, FIIs were modest net buyers to the tune of ₹ 257.5 bn.

Mind you, this was for the full year 2021. That works out to just a little over ₹ 2 bn in net buying per month in a raging bull market. It was the Indian retail investor that drove the market higher.

So this means foreigners did not buy in the covid bull market. Then they have been selling relentlessly after the market peaked in 2021. And they have picked up the intensity of selling this year.

Is it any wonder the Indian stock market has been struggling to scale new highs since October 2021?

It's the FIIs' fault.

But why? What are the reasons for this relentless selling?

Well, we can think of four main reasons. Let's examine them one at a time…

• Rising Interest Rates

Central banks all over the world have been increasing interest rates to fight inflation.

During covid, they eased liquidity and cut rates to record low levels (even zero in some cases). This was to ensure that their economies did not freeze up during the lockdowns.

They did not pay attention to the risks of high inflation because during covid, that seemed like a remote possibility.

But things soon changed. You could say, the economic situation flipped 180 degrees. As soon as people started to get back to their regular lives, inflation hit hard.

Central banks are raising interest rates to try and get ahead of inflation before it gets out of hand. They have been at it since. There is no indication that interest rates will come down soon. Thus the stock market has to get used to high interest rates.

This is bad news for emerging markets like India. Whenever, interest rates in developed countries rise, money flows back to these economies as they are perceived to be ‘safer'.

This has been going on since the second half of 2021 and it doesn't look like ending any time soon.

• Depreciating Rupee

When compared to other emerging markets, the rupee has fallen less. But that can't hide the fact that the depreciation of the rupee has been significant.

From 73 to a dollar in September 2021, the rupee fell to 83 in October 2022. That's a decline of 12% in 13 months.

This is a big loss to any foreigner holding Indian assets. If the asset did not rise in value by at least 12% during this time, he would face a loss.

During this period Indian stock markets were falling. Thus FIIs faced a double loss…on the stocks and on the currency.

Thus they have been selling shares in India and other emerging markets and taking the funds back to the US and other developed markets.

• Flight to Safety Due to Fears of a Recession

Almost everyone thinks the US will fall into a recession this year along with the rest of the developed world.

This is a very real possibility. And as they say, when the US sneezes, the world catches a cold. The market thinks if the US is in a recession, there could be a global recession. This fear has been driving markets lower.

• The Reopening of China

China has been a pariah on financial markets ever since covid. We have seen harsh lockdowns, investigations against leading Chinese businessmen, a clampdown on several industries, and a disastrous zero-covid policy.

And this is aside from all the geo-political tensions with Taiwan and the US.

But 2023 could be different. China is reopening for business.

By that we mean pre-covid business as usual. This will give a big boost to its economy. Thus its stock market, beaten down as it is, will look very attractive to foreign investors.

This partly explains why we have seen a recent acceleration in FII selling in India. A part of the funds are going to China along with the US.

This will be a source of pressure on the Indian market in the short term.