Foreign institutional investors (FIIs) are on a selling spree in Indian markets with the total outflows exceeding ₹22,000 crore in May 2024. FIIs have offloaded ₹22,858 crore within the first six market sessions so far in May 2024. The month marks the crucial last phases of polling for the high stakes' Lok Sabha elections, followed by the counting of votes and results on June 4, 2024.
On the other hand, the domestic institutional investors (DIIs) were net buyers and invested ₹16,700.19 crore. However, the continued domestic inflows has not been aggressive enough due to uncertainty surrounding election outcome and could not counterbalanced any of the outflows by foreign investors.
Analysts said that high quality largecaps have turned weak now due to the bulk selling by FIIs. FIIs were sellers for all six out of six sessions in May, and the net outflow value stands at ₹22,858 crore, while DIIs were buyers for all sessions, with a total investment of ₹16,700.19 crore, according to stock exchange data.
As per the NSE data, FIIs cumulatively bought ₹11,353.03 crore of Indian equities, while they sold ₹18,347.89 crore --- resulting in an outflow of ₹6,994.86 crore on Thursday, May 9. Meanwhile, DIIs invested ₹16,351.32 crore and offloaded ₹10,708.79 crore, registering an inflow of ₹5,642.53 crore.
The yield on 10-year Treasury notes, the benchmark for global borrowing costs, edged up for a second day after the auction of 10-year notes. The first trigger for the bulk selling by FIIs and foreign portfolio investors (FPIs), in both equity and debt, is the sustained rise in US bond yields. The 10-year bond yield now hovers around 4.7 per cent which is hugely attractive for foreign investors.
In the bond market, the yield on the 10-year Treasury edged down to 4.46 per cent by the end of the day, from 4.50 per cent late Wednesday. The two-year yield, which more closely tracks the expectations for the US Federal Reserve, slipped to 4.81 per cent from 4.84 per cent late Wednesday.
On the near-term outlook, analysts emphasized that the divergence between FII outflows and DII investments is unlikely to last long because the bull run will return as soon as clarity emerges on the outcome of the general elections.
Investors seemed wary of entering the markets before the election results and many are locking their gains by booking profits, according to analysts. This fear has resulted in the country's volatility index (India VIX) climbing for an eleventh straight session to 18.20, the highest since October 2022.
Analysts maintained that one of the major causes of the market's decline is the ongoing uncertainty surrounding the general elections. The level of uncertainty has contributed considerably to the India VIX, a measure of volatility, which reached a 52-week high of 19, cementing fear within the market.
‘’Our market has been largely driven by domestic investors, including HNIs and institutional investors, for the last few months. Now, they are sitting on the sidelines and taking some profit off the table, while FIIs are continuously selling in our market, which is pushing the market lower. The volatility index has risen 70 per cent from its lows, which is creating uncertainty among traders and investors,'' said Santosh Meena, Head of Research, Swastika Investmart Ltd.
The market's fear gauge — ‘India VIX’— indicates how much the Nifty 50 index is expected to change in the next 30 days. A major drop in the volatility index indicates that participants are confident about the near-term market trajectory. The volatility index typically experiences a decline once the election outcome is determined.
The India VIX spiking 72 per cent from the April lows indicates that high volatility will persist for some more time. VIX is based on Nifty index options prices. ‘’The spike in VIX is due to rising volume of options trades. Many investors are buying put options to protect their portfolio in case of an unexpected election outcome,'' said analysts at Geojit Financial Services.
Apart from the uncertainty surrounding election outcome and the impact of high US bond yields, there is another major reason behind the bulk selling by FIIs. That remains to be the current outperformance logged by the Chinese and Hong Kong markets. During the last one month while Nifty is down 1.5 per cent, the Shanghai Composite has risen 2.62 per cent, while the Hang Seng is up by towering 8.8 per cent.
‘’Chinese and Hong Kong markets are cheap with price to earnings (PE) ratio around 10 while India is expensive with double the PE of these markets. So long as this outperformance of the Chinese and Hong Kong market continues, FIIs are likely to sell. The weakness in frontline financials is primarily due to FII selling,'' said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
The US central bank has maintained its key overnight interest rate at the 23-year high mark since July 2023 at 5.25 per cent - 5.50 per cent, and indicated of holding rates high until inflation cools and continually moves to target range.
US Federal Reserve Bank of Boston President Susan Collins recently said that the US economy needs to cool off as an avenue toward getting inflation back to the central bank’s two per cent target. For now, when it comes to monetary policy, “the recent upward surprises to activity and inflation suggest the likely need to keep policy at its current level until we have greater confidence that inflation is moving sustainably toward two per cent," she said.
Hawkish talks by the US Fed have put extra pressure on the Indian stocks. After witnessing some profit booking early this month, such statements enabled the US dollar rate to rebound. The rising US dollar prices have fueled the US Treasury yield so investors are expected to switch money from equity and other assets to currency and treasury markets, said market experts.
Analysts noted that apprehensions are emanating from the unexpectedly low turnout in the elections, so far. One view is that the definite and smooth victory of the ruling dispensation is a bit uncertain now. The market which has already discounted a victory by the ruling BJP is a bit unsure now, as per analysts.
‘’Perhaps, this can be the reason for the apprehension in the market and the bulls shedding their aggressive stance. In the last one month the VIX has spiked over 47 per cent and is hovering around 18 now. This means volatility and uncertainty will continue for some time,'' said Geojits' Dr. V K Vijayakumar.
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Meanwhile investors can use the market weakness to buy high quality largecaps on dips driven down by FII selling. Leading private sector banking names, automobile majors and the leading telecom companies are fundamentally strong and fairly valued. Previous episodes of FII selling turned out to be good buying opportunities, according to the market expert.
Domestic equity benchmarks Sensex on Thursday, May 9 crashed over 1,000 points while the Nifty 50 dived below the 22,000 level due to across-the-board selloff amid general election uncertainties. Investors' wealth eroded by ₹7.34 lakh crore as markets took a heavy beating with frontline indices hitting a two-month low.
Declining for the fifth straight session, the 30-share BSE Sensex dropped 1,062.22 points or 1.45 per cent to settle at 72,404.17. During the day, it tanked 1,132.21 points or 1.54 per cent to 72,334.18. The NSE Nifty dived 345 points or 1.55 per cent to 21,957.50. It tumbled 370.1 points or 1.65 per cent to 21,932.40 during the session.
The broader market under performed the benchmark indices. The Nifty Small Cap 100 ended 2.83 per cent lower and the Nifty Midcap 100 closed 1.85 per cent lower. The overall market capitalisation of BSE-listed firms dropped to nearly ₹393.34 lakh crore from ₹400.69 lakh crore in the previous session, making investors lose nearly ₹7.35 lakh crore in a single session.
Nifty 50 nosedived 800 points or 3.5 per cent and Sensex dropped 2,400 points or 3.3 per cent in the five trading sessions. Continued FIIs selling and fear of not so favorable election outcome have dented market sentiments, according to Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services
‘’With voter turnout ratio (65.68 per cent) slightly lower than 2019 for the same seats (except Assam), investors have turned nervous about BJP’s expected seat count. We expect this volatility to continue in the near term in the absence of any major positive trigger,'' added Khemka.
Prashanth Tapse, Senior VP (Research), Mehta Equities Ltd noted that markets buckled under relentless selling pressure as investors turned risk averse in the ongoing poll season and further lightened their equity exposure to avoid being caught off guard.
‘’As the election season is heating up, investors are trimming their equity exposure at a faster pace, which can be seen from the drubbing that mid and small-caps received. Over the next few weeks, markets could be very volatile with mostly negative bias and we may see traders betting on select stocks, purely based on their fundamentals,'' said Tapse.
Nifty 50 has broken below both the lower boundary of its upward channel and the support of the 50-day exponential moving average around the 22,150 level. The ongoing increase in the volatility index suggests that the current market sentiment may persist, potentially leading Nifty to test the 21,800-21,850 zone soon. Traders are advised to adjust their positions accordingly and prioritize stock selection, according to Ajit Mishra – SVP, Research, Religare Broking Ltd.
On the day of mayhem (F&O expiry), the index kept breaking the supports as buyers did not buy the dips. ‘’The trend looks extremely weak with a possibility of a further fall in the near term. On the higher end, immediate resistance is visible at 22,200; the market might remain sell on rise until it stays below 22,200,'' said Rupak De, Senior Technical Analyst, LKP Securities.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, and not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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