Why Are Foreign Investors Exiting Indian Stocks?
The Indian stock market is currently witnessing an unusual trend. Recently, Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) have been exiting the Indian market, while Domestic Institutional Investors (DIIs) are continuously buying Indian stocks. This selling spree by FIIs and FPIs is a cause for concern and is increasing market volatility. Let's explore why this is happening and its potential impact on your investments.
What's Happening?
In May, the Indian market has faced significant selling from foreign investors. According to data from the National Securities Depository Limited, FPIs sold Rs 23,652 crore worth of equities up to May 14, 2024. Additionally, FIIs exited the cash market with sales amounting to Rs 33,539.94 crore. Meanwhile, DIIs are taking advantage of this decline by purchasing Indian stocks. Up to May 14, 2024, DIIs have bought Rs 26,500.61 crore worth of shares in the cash market, countering the selling by FIIs.
Why is the Selling Happening?
Several key factors are driving this sell-off by foreign investors, beyond just election-related uncertainty: Better Performance of International Markets: The Indian market has underperformed compared to China and Hong Kong. The Indian stock market fell by 2.06% last month, while the Shanghai Composite and Hang Seng indices rose by 3.96% and 10.93%, respectively.
High US Bond Yields: Rising interest rates on US bonds are attracting investors, reducing the flow of money into the Indian market.
Slowing US Economy: Decisions by the US Federal Reserve have created uncertainty. Employment figures indicate a slowing US economy, which may necessitate interest rate cuts.
What Does This Mean for Investors?
Market Volatility: The India VIX, also known as the Fear Index, has surged by 88% from its low on April 24, 2024, reaching 18 on May 9, a 19-month high. Opportunities for Long-Term Investors: Despite the market decline, this sell-off could present opportunities for long-term investors to buy good companies at lower valuations. However, it is crucial to consider other factors as well.
What’s Next?
FIIs are currently operating under a strategy that views India as ‘expensive’ and China as ‘cheap’. As a result, they are selling Indian shares and investing in Chinese and Hong Kong markets. This strategy is driven by the fact that India's price-to-earnings (PE) ratio is more than double that of Hong Kong. As long as this ‘Sell India, Buy China’ trend continues, there will be pressure on the market. However, the situation could change significantly after the election results. If the results are favourable from a market perspective, aggressive buying by DIIs, retail investors, and high-networth individuals could provide a new direction to the market.
Teji Mandi (TM Investment Technologies Pvt Ltd) is a SEBI registered Research Analyst (RA). Information in this article should not be construed as investment advice. Please visit www.tejimandi.com to know more.