Foreign institutional investors (FIIs) remained sellers in Indian equities for January, the fourth consecutive month, marking the longest such streak in five years. They turned aggressive sellers in the last few sessions, spooked by rising US bond yields and oil prices.
FIIs have sold around $3.05 billion of Indian equities so far in this month, the most since March 2020, and have been on a selling spree since October 2021, offloading a combined worth of $8.17 billion shares in these four month. The last four-month selling streak was seen in January 2017.
“The recent FPI (foreign portfolio investor) selling is due to the prospects of an end of monetary stimulus across the globe and raising of interest rates. This can impact valuations of equities and can result in reversal of carry trade that was one of the reasons of the previous bull runs,” said Deepak Jasani, head of retail research, HDFC Securities.
Jasani expects foreign investors to start buying Indian equities again if these prospects get delayed and/or due to some large policy change that can trigger a change in sentiment and push momentum in corporate earnings growth.
On January 26, the US Federal Reserve maintained that quantitative easing will end in March while signalling that rate hikes may be imminent. Both these measures are aimed at taming US inflation, currently at a four-decade high of around 7 percent.
Domestically, corporate earnings were largely in line with estimates. However, higher commodity prices took a toll on margins and profitability to some extent, also worrying foreign investors. Analysts said the rise in COVID-19 cases and the increase in crude oil prices mean margins would be under pressure in the current quarter as well.
Investors are now awaiting the budget which is on February 1. Analysts believe the deficit is likely to be at 6.2 percent of GDP, backed by double-digit nominal growth. Analysts also expect that the domestic bond yields and market could come under further pressure on higher borrowings and policy normalisation in the absence of support.
The high number of co vid cases is also affecting FII sentiment. India reported over 2.5 lakh new cases on Thursday taking the total tally to over 4.06 crore, according to government data.
“FPIs have been booking profits in IT where they have been sitting on big profits after the huge appreciation in the last two years. FPI selling has depressed the stock prices of financials, particularly that of leading banks. This is an opportunity for retail investors to buy into this performing segment. From the FPI perspective, the market is expecting budget proposals to include India in the global debt indices,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.
However, Vijayakumar believes a post-budget rally triggered by some positive proposals could turn the market around, prompting FPIs to turn buyers.
Analysts say that the domestic trend will be muted in the short term considering the budget and the outcome of the upcoming state elections. In the coming week, the release of PMI data for January will be a key domestic data point that investors should watch.