Why did FIIs sell over Rs 15,000 crore in just three sessions, and should you worry?

Higher yields make US bonds more attractive, prompting investors to rotate money out of riskier assets like emerging market equities into safer destinations.

After powering the recent leg of the market rally, foreign institutional investors (FIIs) have suddenly turned aggressive sellers, sparking concern among some market participants if there are further outflows on cards.

During the last four sessions, FIIs offloaded equities worth Rs 15,587 crore - including a massive Rs 10,000 crore selloff on Tuesday, which was the biggest single-day sell figure in over two months. The selling pressure continued with another Rs 5,000 crore exit on Thursday, raising fear among investors over whether the return of FIIs was just a blip.

Experts believe a mix of global and domestic factors have triggered the sharp reversal in the FII sentiment, and one of them is a steep rise in bond yields globally, particularly in the United States and Japan. The US 10-year Treasury yield recently rose to 4.52 percent while the 30-year yield touched 5.14 percent, reflecting concerns over America’s ballooning fiscal deficit and its impact on financial markets.

Higher yields make US bonds more attractive, prompting investors to rotate money out of riskier assets like emerging market equities into safer destinations.

Japan’s 30-year government bond yield too surged to 3.14 percent, reflecting a broader shift towards tighter financial conditions across major economies. The recent downgrade of the US sovereign credit outlook by Moody’s has further spooked global investors, adding to the volatility in bond and equity markets alike.

Reports of Israel considering a strike on Iran have renewed fears of instability in the Middle East region, threatening to push oil prices higher and trigger a global risk-off sentiment. Crude is currently hovering around $64 level a barrel, having lost over 3 percent in the last one month.

For FIIs, who tend to be quick to react to such developments, this has become another reason to reduce exposure to comparatively riskier emerging markets.

On the domestic front, a mild uptick in COVID cases in parts of India has not gone unnoticed, although it's not yet a cause for concern, say analysts. However, it adds to the cloud of uncertainty shrouding investors.

Which brings us to the question, whether retail investors need to be worried? Not necessarily, say experts. Despite the sharp outflows, analysts believe the selling is more tactical than structural.

“There is no meaningful negative trigger on the domestic front to justify the kind of selling we’re seeing. It looks more like a short-term reaction to global events,” said Sunny Agrawal, DVP and Head of Fundamental Research at SBI Securities. As the dollar index stabilises around the 100 mark, Agrawal said he sees flows into emerging markets like India resuming. Given India’s substantial 16-17 percent weight in the EM basket, it is well-positioned to benefit when sentiment improves.

Aishvarya Dadheech, Founder and CIO of Fident Asset Management too has a similar view. “The current pullback is more of a knee-jerk reaction to the sharp spike in US yields. This isn’t a structural reversal in FII sentiment,” he said. India’s strong macroeconomic fundamentals and growth trajectory remain intact, he pointed out, adding that he doesn’t see a repeat of the large-scale outflows like the $7–8 billion we saw earlier this year.”

For the year so far, FIIs have been net sellers of shares worth Rs 1.22 lakh crore, while DIIs have net bought Rs 2.41 lakh crore worth of shares.

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