Worst of FII outflows behind, their impact getting smaller, says MOFSL

FIIs have sold off Indian equities worth $28 billion over the past five months.

The relentless FII exodus has been one of the most detrimental factors that has triggered the market rout in recent months. However, brokerage firm Motilal Oswal Financial Services sees light at the end of the tunnel as it believes the worst of FII outflows are behind, especially after the $28 billion selloff seen over the past five months.

This selling spree represents about 85 percent of the highest-ever FII outflow streak of USD 32.5 billion recorded between October 2021 and June 2022, the firm noted. Domestic headwinds including corporate earnings growth and a slowing economy, and external pressures stemming from rising US bond yields, a strengthening dollar Index, and China's AI advancements have been the root causes behind the selloff.

Despite these headwinds though, MOFSL believes that the impact of FII outflows on Indian markets appears to be diminishing. While the Nifty has corrected about 16 percent from its peak, the response has been more measured compared to past downturns.

To quantify, MOFSL highlighted that in the 2015-16 phase, FIIs sold $4 billion in Indian equities, triggering a 23 percent market correction. The current selling, however, saw a selloff that was nearly seven times larger at $28 billion, but still resulted in a comparatively lower 16 percent market fall. "Even after adjusting for index levels, the impact of this FII selling is roughly 2.7 times the intensity of the 2015-16 phase," the firm noted.

"This reflects a milder impact of FII selling on the Indian market and the increased counterweight of DII inflows, which remained strong at nearly $44 billion during the current phase of market downturn," MOFSL stated.

Looking ahead, MOFSL holds the view that any eventual strengthening of the US economy, driven by multi-faceted policy measures, could benefit Indian exporters, while the impact of the Trump's reciprocal tariff policy is unlikely to be severe.

India's finance minister proactively reduced customs duties on select imports in the Union Budget, and the Prime Minister's recent US visit also hinted a stronger partnership in energy and defence, which could help narrow the trade deficit and address US concerns, the firm believes.

Additionally, the firm pointed towards the ongoing US-China trade standoff which according to MOFSL, could redirect global demand toward alternative markets, including India. "As initial reactions to the new US administration’s policies subside, we anticipate that FII outflows from Indian equities will begin to moderate," it said.

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