Foreign investors have continued their selling spree in financial services stocks, offloading around Rs 14,790 crore in the first half of August, a Moneycontrol analysis showed. This follows a net sale of Rs 8,100 crore in financial sector stocks during the second half of July.
In the first two weeks of August, FIIs have so far offloaded roughly Rs 18,824 crore from Indian equity markets amid sharp volatility in local equities.
Banks Bear the Brunt
The selling by FIIs in banking shares is driven by concerns over slow deposit growth, which was underscored by RBI at the last MPC briefing. RBI governor Shaktikanta Das highlighted the risk related to liquidity as credit growth outpaces deposits.
Analysts, too, have noted that challenges in raising deposits may be making investors wary of the banking space. As non-banking financial companies (NBFCs) depend on market borrowings and bank loans for funding, they are also likely to be affected. Additionally, major banks struggled in Q1FY25 with shrinking margins, deteriorating asset quality, and rising provisions, particularly in credit cards, personal loans, and agriculture portfolios.
Recently, PSU bank stocks came under pressure after the RBI proposed stricter liquidity norms in July, a move that could reduce Liquidity Coverage Ratio (LCR) by 20-30 percentage points, forcing banks to either increase deposits or slow loan growth, potentially impacting earnings by 4-10%, with PSU banks expected to be hit the hardest.
The liquidity coverage ratio (LCR) is a measure that ensures financial institutions maintain a sufficient amount of highly liquid assets to meet short-term obligations during periods of financial stress.
Metals Facing Music
FIIs were net sellers in metals and mining stocks too, offloading Rs 2,668 crore after the Supreme Court allowed states to levy taxes and royalties on minerals, in addition to central duties, and to collect past dues. According to a Fitch note, operating costs for miners are expected to rise following the ruling by the apex court. "We see increased risks of a sustained weakening in companies' EBITDA margins due to the prospective levies," the rating agency said.
Pockets of Pain
In addition to metals and financial services, FIIs were net sellers in several other sectors: services (Rs 2,088 crore), construction materials (Rs 2,036 crore), automobiles and auto components (Rs 1,628 crore), oil and gas (Rs 1,311 crore), capital goods (Rs 1,089 crore), construction (Rs 699 crore), and consumer durables and IT, with selling of Rs 584 crore and Rs 493 crore, respectively.
Where is FII Buying Emerging?
On the buying side, FIIs invested in healthcare (Rs 3,462 crore), consumer services (Rs 2,196 crore), FMCG (Rs 1,785 crore), power (Rs 1,169 crore), and telecommunications (Rs 662 crore).
This turbulence was driven by global market jitters - triggered by weak US economic data and recession fears - which were further intensified by the Bank of Japan's hawkish stance.
The Global Context
The Japanese stock market was particularly affected by the unwinding of the yen carry trade, leading to a sharp 20-yen drop in the dollar-yen pair between July 3 and August 5. The trigger for this was Japan's intervention in the currency market and a Bank of Japan rate hike. However, markets have since rallied after the Bank of Japan reassured investors it wouldn't raise rates during financial instability, and U.S. jobless claims data has eased slowdown concerns.
During the first two weeks of August, India's benchmark indices, Sensex and Nifty, have declined about 3.2 percent each, while BSE MidCap and SmallCap lost over 4.3 percent.
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