FII flows may take a hit due to Fed’s bond tapering

Foreign liquidity of Indian shares may come under threat as the US Federal Reserve is gearing up to taper bond purchases faster than anticipated. Foreign institutional investors (FIIs) have been consistently dumping Indian shares for the last few months amid concerns of steep valuations and the spread of the Omicron variant of covid, which is feared will disrupt economic activity.

India has lost $3.4 billion FII money in equities since October, an indication that markets may not see robust liquidity flow. The looming threat of Omicron is also threatening a rally in equities amid a sustained recovery of India’s domestic economy. In October, FIIs sold Indian equities worth $2.27 billion and sold $756 million and $368 million in November and December, respectively.

India has seen net FIIs outflows, driven by overstretched valuation in certain pockets after strong market run-up this year, according to Sanjeev Hota, head of research, Sharekhan by BNP Paribas. This makes the Indian market less attractive than other emerging markets and overhang in the Chinese market also makes the entire emerging market basket less attractive for FIIs, Hota said.

“Further, the worry around inflation risk and Fed tapering off sooner could lead to a further major sell-off by FIIs could be bit exaggerated, as India is poised for a multi-year structural growth cycle, which makes it an attractive investment bet for the long term, thus notwithstanding some near-term outflows from FIIs, eventually investment will flow to the Indian market given its investment attractiveness,” he said.

Hota added that notwithstanding near-term volatility and reasonable correction in the market, in the last seven-eight years, the Indian market has witnessed strong support from domestic investors in the absence of FII flows. “Thus, even if there is outflows from FIIs in the near to medium term owing to multiple tactical reasons, the Indian market given its long-term growth potential and pro-growth government policy will eventually find support from both domestic and foreign investors,” Hota said.

In 2021 so far, FIIs have been net buyers of Indian shares worth $5.17 billion. Domestic institutional investors (DIIs) have been net buyers of shares worth ₹71,883.90 crore. In November, they were net buyers of ₹30,522.02 crore and ₹4,839.67 crore in December.