FII selling in Indian stock market may continue despite ₹27,000 crore outflow in Jan so far, say analysts; here's why

The Indian stock market has experienced persistent outflows of foreign funds since the start of this month, with Foreign Institutional Investors (FIIs) offloading nearly ₹27,000 crore in Indian equities so far in January 2024. 

This extensive sell-off has exerted downward pressure on the benchmark equity indices, Sensex and Nifty 50, leading to a decline of over one percent in both indices during the current month.

The disappointing corporate earnings reported by select major Indian banks in the December quarter, coupled with concerns over elevated valuations of domestic equities and increasing US Treasury yields, have prompted FIIs to dump Indian equities. This sell-off is further fueled by diminishing expectations of an interest rate cut by the US Federal Reserve.

Also Read: Nearly 60% of Nifty 50 stocks are down this month; 8 stocks dipped more than 10%

However, trends show the foreign portfolio investors (FPI) have been buying IT stocks this month after the management commentary following the Q3 results of IT managers indicated optimism of demand revival in the sector."

“The FPIs have been persistently selling in the emerging markets (EMs), including India. They were big sellers in other EMs too like Taiwan, South Korea and Hong Kong. A key reason behind FII selling is the rising US bond yields with the 10-year yield surging from the recent level of 3.9% to 4.15% triggering capital outflows from EMs. FIIs have turned to risk-off strategies as interest rates still remain high,” said Vinod Nair.

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Meanwhile, the market expectation of early interest rate cuts by the US Federal Reserve has also come down. This triggered a spike in Treasury yields as interest rates are likely to remain higher for some more time.

Another reason highlighted by Nair for FII selling is the high valuations in India. FIIs used the excuse of less-than-expected results from HDFC Bank to press massive sales and increase their short positions.

Also Read: HDFC Bank, ICICI, Axis, Kotak Bank shares volatile as Q3 results reflect margin pressures; here’s why banks are falling

The earnings growth trajectory in India reflects a discernible deceleration. The premium valuation that Indian markets enjoyed is now coming down due to slowing earnings growth.

“In Q1, the Nifty 100 stocks demonstrated a robust earnings growth of approximately 30-35%, which moderated to 25% in Q2. A further deceleration was seen in Q3 with earnings growth now around 15-20%. Why would FIIs give premium valuations to India when earnings growth is slowing?,” said Nair.

He expects FII selling in Indian markets would continue going ahead amid domestic concerns over high valuations as well as uncertainty over interest rate cuts in the US.

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