Samvat 2079 Roundtable: Why are FIIs selling heavily? Market masters answer

Foreign portfolio investors (or FPIs) have sold Indian equities worth Rs 1.79 lakh crore in this calendar year, shows data available with National Securities Depository Ltd (NSDL). Liquidity tightening, rising interest rates, expensive valuations, are some of the many reasons cited by analysts behind this selling spree.

At Moneycontrol’s Muhurat Roundtable, we asked D-Street veterans to decode FII selling and retail investors coming to the rescue in their absence.

Did India pay the price for Russia?

Soon after Russia invaded Ukraine on February 24, the western world imposed a series of stringent sanctions and central bank restrictions on Russia. Select Russian banks were cut off from the SWIFT network and the country’s equity market was deemed "uninvestable". Sanctions were also imposed on China for not taking a strong stance against Russia’s actions.

On March 2, MSCI announced Russia’s removal from its Emerging Market Index. At the start of the year, Russia accounted for around 4 percent of the index. On March 9, Russia’s weightage went to zero.

“Russia collapsed, China collapsed, emerging markets in general collapsed. The whole system froze in Russia. So, India's weightage actually went up. Most large institutions that follow the weighted system of investing money had to sell Indian equities because our weightage was disproportionately higher,” explained Madhusudan Kela, founder of MK Ventures.

Manish Chokhani, Director, Enam Holdings, added, “Foreign investors could not sell from China and they could not sell from Russia. So you sell where you're able to, which was India.”

How retail investors came to the rescue

Data from Bloomberg suggests DIIs or domestic institutional investors have bought Indian equities worth Rs 2.62 lakh crore in 2022 so far. Veteran fund manager Prashant Jain explains why this is great news. “Equities have moved from a peripheral asset class to a central asset class for Indian households. And, India's pool of household savings is very large. Just financial savings is $300 billion a year,” he said.

According to him, the flow of local savings will be significant to arrest the market volatility related to FII outflows.​

Sunil Singhania, Founder and CIO, Abakkus Asset Manager, believes monthly SIP (systematic investment plan) flows of about $2 billion will continue to remain sticky. “Hats off to the Indian retail investor. They have understood the concept of investing regularly and are having confidence in the Indian economy. I think this $20-25 billion a year looks very, very sticky. On top of it, you have the pension flows, which stand at $1-1.5 billion a month,” he explained.

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However, Jain adds a word of caution. With interest rates rising, banks have now started hiking retail fixed deposit rates. “Once bank deposit rates start touching 8 percent, 9 percent, inflow into equities might take a hit.”

When will FIIs return to Indian shores?

Madhusudan Kela and Manish Chokhani point towards the bigger picture. “Instead of focusing only on foreign flows in secondary markets, we need to look at what’s happening in Foreign Direct Investment (FDI) as a whole,” they said. As per government data, cumulative amount of FDI inflow between April 2000 and March 2022 stood at $847 billion.

“So, outflow of roughly $35 billion from secondary market is not a big deal per se,” said Kela.

Chokhani added, “I don't think two years ago you could have dreamt that Apple will launch iPhone 14 and say Make in India. It's clear that the world has made up its mind that India is a friendly shore. I think the space that has opened up for FDI and private equity is far, far greater than what is going to come from the FII side.”

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With India’s economy growing at a fast pace, FIIs will turn buyers of Indian equities soon, believe market veterans. “India is indeed emerging as a standalone core asset class. It's the fifth largest economy in the world, it's the fourth largest market,” said Jain.

“The moot point is when they (FIIs) sold, it got absorbed by the locals. When they come to buy, what will happen to the market?” questioned Kela. We can only wait and watch.