FIIs on selling spree: What’s unnerving FIIs? Will the trend reverse soon?

Anticipation of liquidity tapering seems to be at play behind the FII outflow. The post-pandemic rally in markets across the globe has primarily been liquidity-driven and a tapering of the monetary stimulus is likely to trigger a correction in markets, experts said.

Last week, the Central Bank of Sri Lanka increased interest rates, becoming the first Asian country to do so since the outbreak of the coronavirus pandemic. On August 25, the Bank of Korea bit the bullet and increased interest rates for the first time in almost three years.

“FIIs might be exercising caution at the moment as they might be expecting other governments also might do the same,” said Vishal Balabhadruni, BFSI analyst at CapitalVia Global Research.

Balabhadruni emphasised that an impending third wave of the pandemic, accelerating inflation and a rising dollar index may also be reasons for the current stance of FIIs.

Ajit Mishra, VP-research at Religare Broking, blames the rising number of Covid-19 cases, tapering talk by the US Federal Reserve and sluggish economic recovery for the exit of FIIs.

“We believe the rising cases globally and talk of tapering by the US Fed have led the FIIs to sell in the Indian markets. FIIs have been net sellers in the Indian markets since the start of FY22, which can be mainly attributed to the slow pace of vaccination and the impact of the second wave which might delay the pace of economic recovery,” said Mishra.

Concern over the rich valuation of the Indian markets may be one of the most important factors behind FII selling.

“Stretched valuations, improved corporate earnings visibility in home countries like the US and a weakening Indian currency have been the prime factors for FIIs outflows in recent months. Market cap to GDP over 120 percent looks to be at a significant premium,” said Binod Modi, head of strategy at Reliance Securities. “Further, S&P 500 companies have delivered robust earnings performance in the June quarter with upbeat commentaries, which also offered decent risk-reward proposition for foreign investors in their home countries.”

Vinit Bolinjkar, head of research at Ventura Securities, agreed that the higher market valuation is the main reason for the exit of FIIs.

“The Sensex is trading at CY22 P/E 20.7 times (EPS of Rs 2,711), which is higher than the average one-year forwarded P/E of 19 times. So, the current valuations are on the higher side and have already priced in the positives of future economic recovery,” Bolinjkar pointed out. “It is normal and rational for FIIs to reduce their stakes and book profits at the present stretched valuations. This would result in a healthy correction in the market and provide opportunities to re-enter at a better price point.”

Will the outflow continue?

Analysts said the outflow of foreign funds may continue in the short term.

Balabhadruni expects the trend to reverse after the markets have a healthy correction. He said profit-booking by FIIs will continue in the near term. Partial exit on high-value stocks and accumulation on dips will keep the overall markets range-bound, he said.

However, experts said there’s no need to be nervous about this short-term trend because the long-term prospects of the Indian markets remain bright due to the economic recovery, faster pace of vaccination and healthy corporate earnings.

“India is in the initial phase of a capex recovery cycle, which should result in sustainable earnings growth in subsequent years. Further, a satisfactory ramp-up in vaccination progress and improvement in high-frequency key economic indicators augur well for the domestic markets,” Modi pointed out. “India continues to offer promising opportunity in the long run for investors considering reforms undertaken by the government, which should aid FII inflows in the ensuing period.”

Mishra said a ramp-up in vaccination would increase the confidence of investors for a faster economic recovery, which can reverse the trend and aid inflows. The US Fed’s decision on interest rates and the tapering of the stimulus would also influence flows into emerging markets including India, he said.

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