FII outflow shoots past Rs 2 lakh crore since October, but DIIs offer a balance

Foreign institutional investors (FII) continue to offload their holdings in the Indian equity markets for the sixth month in a row, making it perhaps the longest monthly selling streak with high volumes.

Their net selloff in these six months has shot past Rs 2 lakh crore and reached Rs 2,06,649 crore since last October. In February 2022, the outflow was highest since March 2020 when the COVID pandemic hit the Indian shores.

The FIIs have net sold more than Rs 2.5 lakh crore worth of shares in the current financial year ending this month.

The beginning of the selling streak was in October when the market touched its record high. High valuations triggered by a market running ahead of fundamentals, and rising expectations of rate hikes in the US to fight record inflation of 7.5 percent, stoked the unabated FII outflow.

An increasing margin pressure seen in corporate earnings because of elevated commodity prices in the international markets, followed by the outbreak of the Ukraine-Russia conflict and a resultant spike in crude oil prices and most other commodities including metals added fuel to the fire.

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The market hit a record high of 18,604 on the Nifty50 and 62,245 on the BSE Sensex on October 19, 2021. Since then both benchmark indices corrected nearly 13 percent.

Brent crude futures, the international oil price benchmark, surged to nearly $120 a barrel last week, for the first time since May 2012, before closing at $118.1 a barrel on Friday. In more than two-and-a-half months, the oil prices rallied 68 percent.

Experts largely expect the outflow to continue at least till the rate outlook by the Federal Reserve gets stabilised and economic growth engines run smoothly again.

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"Indian markets were already trading at high premiums to other emerging markets. So, apart from valuations, the interest rate movement played an important role in FIIs outflows," said Nimish Shah, Chief Investment Officer, Listed Investments at Waterfield Advisors.

The return of FIIs to emerging markets would largely depend on interest rate movements in the US, he said. "We believe that in the medium term as the outlook on rate stabilises and global growth continues, equity allocations by FII would resume."

Domestic institutional investors (DIIs), took the contrarian stand to their overseas peers. They provided a strong support and a good alternative by pumping Rs 1.42 lakh crore into equity space in the last six months.

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Even in the first few days of March, while FIIs recalled Rs 18,615 crore, DIIs invested Rs 12,600 crore. With this, they have poured in Rs 1.94 lakh crore of funds in the current financial year so far.

"In spite of a correction of around 13 percent from its peak in the Nifty, the FPIs continue to sell since market sentiments have been impacted globally by the uncertainty triggered by the war and the surge in crude. In February, FPI selling of Rs 45,720 crore has been matched by DII buying of Rs 42,084 crore preventing a major crash in the market. There is a tug-of-war going on between FPIs and DIIs," says VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

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