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Fears of aggressive quantitative tightening by the US Federal Reserve to tame inflation has triggered selling of Indian stocks by foreign portfolio investors (FPIs). In fact, the current spree FPI selling in Indian equities is turning out to be the highest ever since the global financial crisis of 2008, as per an analysis by ICICI Securities Ltd. 

In a report dated 30 June, the domestic brokerage house said, the trailing twelve month (TTM) FPI cumulative selling in the secondary market stood at $53 billion compared to $28 billion during the 2008 financial crisis, as per provisional flows data from exchanges.

Sector-wise, the bulk of FPI selling on 12 month rolling basis has been concentrated around financials and IT (93% contribution) along with FMCG, other services and construction materials, it said. On the other hand, stocks in the metals, power, discretionary consumption and telecom sectors saw inflows.

Despite the steep FPI selling, key Indian equity benchmarks have not seen a severe fall, thanks to buying by domestic institutional investors. "Consequently, the impact on benchmark indices (NIFTY50, Nifty Midcap) is much lower (15-25% drawdown) compared to GFC (global financial crisis)," said the report. 

According to ICICI Securities, the rise in SIP flows appears structural (monthly run-rate exceeding Rs110 billion), which is also reflected in tripling of mutual fund accounts from 40 million in December 2014 to 129 million in March 2022. SIP is short for systematic investment plan.

Meanwhile, following the incessant FPI selling, valuations of Indian equities have moderated from recent highs. 

Valuations of Indian stocks have rationalised significantly from October 21 levels and the fear of a structural increase in inflation has been easing as global commodity prices decline which should build confidence of slowing down of FPI outflows incrementally, said the ICICI Securities report. However, the risk still remains in terms of elevated retail inflation and crude oil prices which are yet to climb down meaningfully from their recent peaks, it cautioned.

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