Persistent FII selling may hit IT, banking stocks hard; DIIs to book profit after Nifty crosses 20K?

The constant FII selling and DII buying can cause increased market volatility, and FII selling can lead to rupee depreciation, said experts.

Foreign institutional investors (FIIs) are on a selling spree offloading Rs 55,723 crore worth of Indian shares since August 1, 2023, marking their longest selling spree since mid-January. Meanwhile, DIIs have bought domestic equities worth Rs 49,763 crore during this period.

This trend if it continues is likely to hit FIIs’ favourite IT and Infra stocks hard, while may boost infra and consumer stocks preferred by DIIs, said experts.

Experts said the persistent FII outflows can be traced to the macroeconomic indicators. During this time, it was the sustained buying by the DIIs that supported the market and prevented large market crashes. DII buying is driving the market higher despite FII selling, according to Arvinder Singh Nanda, Senior Vice President, Master Capital Services.

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DIIs might do some profit-booking when Nifty goes above 20,000 believes V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services. The constant FII selling and DII buying can cause increased market volatility, and FII selling can lead to rupee depreciation, according to experts.

Why are FIIs on a selling spree?

US Treasury yields hit a multi-year high and the dollar index is above 106 amidst concerns over interest rates staying high for an extended period and its impact on the global economy. "The sustained rise in the US bond yields, high crude oil prices and stronger US dollar have triggered continuous FII selling in Indian markets," Nanda told Moneycontrol.

What is behind sustained DII buying?

Experts believe that DIIs don't have to bother about the short-term volatility caused by the rising dollar and spiking bond yields. "DIIs continue to receive good fund inflows and they are investing in stocks whose valuations are fair. So long as the Indian economy continues to do well and corporate earnings are good, fund flows into DIIs will sustain," Vijayakumar of Geojit Financial Services told Moneycontrol.

According to Nanda, DIIs have been investing and FIIs selling to take advantage of a reduction in valuations. “FII selling opens new opportunities for domestic investors as they are not impacted by the movement of US bond yields,” he said, adding that more and more retail investors are entering the stock market and investments are increasing.

Also Read: Top 10 Nifty 500 stocks with maximum growth in public shareholder base since the pandemic

DIIs win tug of war with FIIs

In January and February this year, the FII strategy of 'Sell India, Buy China' brought the market down, giving good buying opportunities to DIIs. But soon the FIIs took a U-turn and moved to a 'Buy India, Sell China' strategy, enabling the market to set a series of new highs. DIIs and retail investors who bought in the first two months of this year benefited from the rally. “FIIs, particularly the fleet-footed ones, are influenced disproportionately by the US bond yields whereas DIIs are investing in the long-term India growth story,” said V K Vijayakumar.

Impact on market sentiment

It is expected that the rising US bond yields, strengthening dollar and persistent selling by FIIs could further impact market sentiments. "FIIs sell their market investments, which means that liquidity is being pulled out of the market. As a result of such actions by FIIs, the benchmark indices, Nifty and Sensex, can witness a fall," Nanda told Moneycontrol.

FII selling to continue?

There is a good chance of a reversal in the FII sell strategy, if another rate hike, which the market expects now, does not materialise. This will trigger a decline in US bond yields and a U-turn in the FII strategy. However, the behaviour of DIIs is unlikely to change, said Vijayakumar.

Also Read: Market must 'pause to reflect' on current global situation, says Nilesh Shah

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