Will FIIs make a comeback to India?

“A prolonged conflict may still trigger further selling − we estimate around $7-8 billion outflows in such a scenario, similar to the levels seen during the global financial crisis. Global liquidity tightening and inflation remain overarching concerns as well,” HSBC said.

Also read: ICICI Bank tops rival HDFC Bank in valuation multiple for the first time

There was a brief respite when FIIs bought a net $2.11 billion in India equities between March 30 and April 5. However, so far in April, they have sold $2.36 billion of shares.

The China factor

Adding to the pain is the resurgence in Covid-19 cases in China, which has adopted a zero-Covid policy and has imposed restrictions to curb the spread of the virus. This is expected to drag the country’s economic growth and in turn impact global growth.

The International Monetary Fund has cut the growth forecast of the global economy and Asian economies such as China and India in its latest economic outlook report.

Equity investments are generally being scaled down and fund managers favour cash right now. US equity funds had outflows for the second consecutive month, while European funds experienced a ninth straight week of outflows. In the past six trading sessions, FIIs sold about $2 billion in Indian equities.

“As far as emerging markets are concerned, if international tensions ease over the next few months, the dollar will lose some of its safe haven status. This will have investment money flowing out of the dollar into other parts of the world, supporting emerging market stocks,” said Deepak Jasani, head of retail research at HDFC Securities.

Also read: Five stocks contributed to 7% fall in Sensex, Nifty in nine sessions

Some respite may come from company earnings, with analysts expecting sectors such as financials, commodities and consumer durables to report strong results in the March quarter. However, no company’s results have been able to boost confidence. HDFC Bank reported disappointing core income growth and operating profit. Infosys and Tata Consultancy Services reported weak margins.

According to Mohit Nigam, Head - PMS at Hem Securities, earnings growth of Indian companies has decelerated compared with previous financial years.

Local investors have supported the stock market in the midst of the FII selling.

“We believe that the DIIs (domestic institutional investors) have been like a knight in shining armour for the markets as they have been holding the fort with sustained buying on future growth prospects of India,” Nigam said.

DIIs have purchased Rs 1.87 lakh crore of equities since October 1, according to data from the National Stock Exchange of India. So far this April, they have bought Rs 14,252 crore of shares.

According to Yesha Shah, head of equity research at Samco Securities, FIIs are likely to make a comeback given India’s fundamental positioning and structural appeal among emerging economies. Shah said there is political stability in India and policy support for inducing economic growth.

These factors, along with expectations that India will remain one of the fastest-growing major economies, make the country a relatively attractive emerging market for mid- to long-term investments.