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

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.