India’s stock markets are witnessing a contrasting trend over the past few days. While the benchmark indices are at record highs, foreign institutional investors (FIIs) are on a selling spree within the cash segment.
FIIs have sold shares within the cash segment for eight consecutive sessions. On August 26, their income within the cash segment were Rs 1,974.48 crore. In August till date, they need taken out Rs 6,873.74 crore within the cash segment, data available with Moneycontrol showed.
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What unnerves FIIs
Anticipation of liquidity tapering seems to be at play behind the FII outflow. The post-pandemic rally in markets across the world has primarily been liquidity-driven and a tapering of the monetary stimulus is probably going to trigger a correction in markets, experts said.
Last week, the financial institution of Sri Lanka increased interest rates, becoming the primary Asian country to try to to so since the outbreak of the coronavirus pandemic. On August 25, the Bank of Korea bit the bullet and increased interest rates for the primary time in almost three years.
“FIIs could be exercising caution at the instant as they could expect other governments also might do an equivalent ,” said Vishal Balabhadruni, BFSI analyst at CapitalVia Global Research.
Balabhadruni emphasised that an impending third wave of the pandemic, accelerating inflation and a rising dollar index can also be reasons for the present stance of FIIs.
Ajit Mishra, VP-research at Religare Broking, blames the rising number of Covid-19 cases, tapering talk by the US Federal Reserve System and sluggish economic recovery for the exit of FIIs.
“We believe the rising cases globally and talk about tapering by the US Fed have led the FIIs to sell within the Indian markets. FIIs are net sellers within the Indian markets since the beginning of FY22, which may be mainly attributed to the slow pace of vaccination and therefore the impact of the second wave which could delay the pace of economic recovery,” said Mishra.
Concern over the rich valuation of the Indian markets could also be one among the foremost important factors behind FII selling.
“Stretched valuations, improved corporate earnings visibility in home countries just like the US and a weakening Indian currency are the prime factors for FIIs outflows in recent months. Market cap to GDP over 120 percent looks to be at a big premium,” said Binod Modi, head of strategy at Reliance Securities. “Further, S&P 500 companies have delivered robust earnings performance within the June quarter with upbeat commentaries, which also offered decent risk-reward proposition for foreign investors in their home countries.”
Vinit Bolinjkar, head of research at Ventura Securities, agreed that the upper market valuation is that the main reason for the exit of FIIs.
“The Sensex is trading at CY22 P/E 20.7 times (EPS of Rs 2,711), which is above the typical one-year forwarded P/E of 19 times. So, the present valuations are on the upper side and have already priced within the positives of future economic recovery,” Bolinjkar acknowledged . “It is normal and rational for FIIs to scale back their stakes and book profits at this stretched valuations. this is able to end in a healthy correction within the market and supply opportunities to re-enter at a far better price point.”
Will the outflow continue?
Analysts said the outflow of foreign funds may continue within the short term.
Balabhadruni expects the trend to reverse after the markets have a healthy correction. He said profit-booking by FIIs will continue within the near term. Partial exit on high-value stocks and accumulation on dips will keep the general markets range-bound, he said.
However, experts said there’s no got to be nervous about this short-term trend because the long-term prospects of the Indian markets remain bright thanks to the economic recovery, faster pace of vaccination and healthy corporate earnings.
“India is within the initial phase of a capex recovery cycle, which should end in sustainable earnings growth in subsequent years. Further, a satisfactory ramp-up in vaccination progress and improvement in high-frequency key economic indicators augur well for the domestic markets,” Modi acknowledged . “India continues to supply promising opportunity within the end of the day for investors considering reforms undertaken by the govt , which should aid FII inflows within the ensuing period.”
Mishra said a ramp-up in vaccination would increase the arrogance of investors for a faster economic recovery, which may reverse the trend and aid inflows. The US Fed’s decision on interest rates and therefore the tapering of the stimulus would also influence flows into emerging markets including India, he said.