Mumbai: Selling of Indian shares by foreign institutional investors (FIIs) intensified in October as the markets plunged, weighed down by several macro concerns amid a global rout.

Foreign institutional investors (FIIs) have sold local equities worth $2.35 billion so far in October, the most since November 2016 when they withdrew $2.6 billion. The sell-off follows an FII outflow of $1.3 billion and $277 million in September and August, respectively.

In 2018, FIIs have sold local equities worth $4.4 billion.

Depreciation of the rupee against the dollar and high crude oil prices are key factors behind the FIIs move to dump India.

“October has been coming together of multitude of factors leading to the high FII outflows. It started off with crude crossing $80 and then we had the US interest rates crossing 3% decisively. This led to the rupee fall, and as we have seen with every rupee depreciation, FII outflows see a significant pick up," said Susmit Patodia, head of sales (institutional equities) at Motilal Oswal Financial Services.

“Domestic factors, such as the IL&FS default, NBFC scare and liquidity drying up, also shook the confidence of the market," he added.

Typically, as sell-offs always peak with sharp depreciation in currency and with the rupee unlikely to see another 10% slide from current levels, Patodia said the intensified FII selling is probably drawing to a close.

Himanshu Srivastava, senior analyst and manager (research) at Morningstar Investment Adviser India, said it was not that FIIs were shunning India, but adopting a more cautious stance and opting for markets where their money could be safer and less vulnerable to volatility.

“India is still trading at a higher level than last year. So those FIIs who remained invested in India over the last three years or so are finding this as a profit-booking opportunity due to uncertainties both on the fundamental and macro levels, especially ahead of the state elections due next month. Overall, both fundamental and macros do not give confidence to foreign investors to remain invested in India rather they will scout for other options where there are more sustainability," Srivastava said.

So far in October, the Sensex lost 3.8% after a steep fall of 6.26% in September. In 2018, the Sensex is still up 2% compared to a fall of 2.39% of the MSCI Emerging Markets index, while the rupee has weakened over 13.5% and Brent crude prices have increased nearly 21.5%.

Care Ratings said in addition to a weak rupee and high crude prices, foreign portfolio investors’ sentiment towards India weakened since the start of this fiscal due to several factors such as the weakening of domestic economic fundamentals (widening current account deficit and concerns over fiscal deficit), interest rate hikes in the US and the resultant shrinking yield differentials, strengthening of the US dollar, global trade developments and tightening global liquidity conditions.

The ratings agency believes FPI flows will continue to be volatile in the coming months.

“The outflows could increase further with US interest rate hikes, tightening global liquidity and escalating trade disputes. The retention of the repo rate in the recent credit policy would also not diminish the absolute differential in returns for FPI between the US and domestic bonds," said Madan Sabnavis and Kavita Chacko, chief economist and senior economist, respectively, at Care Ratings, in a 12 October report.

Domestic fund inflow into capital markets stayed intact in October, recovering from a slowdown in July and August. So far in October, domestic institutional investors (DIIs), including mutual funds and insurers, pumped in 15,796.23 crore and are net buyers of shares worth 97,953.51 crore in 2018 so far.

Sharp sell-off in markets also did not deter fund managers from allocating money into equity mutual fund schemes. According to data from Association of Mutual Funds of India (Amfi), net inflows into domestic equity mutual funds rose to 11,172 crore in September, up 33% from August, even as the Sensex cracked nearly 6% over the same period. The total amount collected through systematic investment plans (SIPs) also increased to 7,727 crore from 7,658 crore in August.

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