The great FPI sell-off

The great FII or FPI sell-off is in progress. They have sold continuously over the last twelve-month period barring for September 21 when they were net buyers to the extent of Rs 913 crore. Fortunately for the markets, our domestic institutions have developed muscle power in the form of a strong SIP base to counter this selling. How long this would continue is anybodys guess.

The last time that the FIIs bought on a net basis for the year was in 2019 and 2020 when they invested Rs 40,000 crore and Rs 64,000 crore, respectively. At this time, domestic institutions also bought 42,000 crore in 2019 but sold 36,000 crore in 2020. In 2021, FIIs sold Rs 93,000 crore while domestic funds bought 95,000 crore. In the current year till date, FIIs sold Rs 2.67 lakh crore and Domestic institutions bought 2.15 lakh crore.

What has led to this massive sell-off is the first question that comes to mind. The first and foremost reason is of course inflation which is at a record over 40 year high in the US and is threatening to continue to rise. Gas prices and now mortgage rates are hitting the normal citizens in the under-belly. They have both risen very fast and are at levels which are close to double compared to the last six months. With such high outgoings, things are unlikely to improve as the FED raises interest rates to keep inflation under control. With a 75-basis point hike in the previous week and another similar hike imminent in six weeks' time, the rates would be at 2.25-2.5 per cent by July end. Unthinkable for the US which believed that inflation would never hit them in the near future.

The next question that comes to mind is why such sharp selling had to be done. India as a market has outperformed the US markets and investments in India even though we are at a 52-week low as of Friday is far better than what the US has done during the same period. Incidentally, the US is also at a 52-week low. While the Indian benchmark indices on a year-to-date basis have seen BSESENSEX lose 11.83 per cent and NIFTY lose 11.87 per cent, Dow Jones has lost a massive 18.09 per cent. NASDAQ has lost much more and is now down 30.98 per cent.

The technology sector and particularly companies which gained handsomely when Covid-19 was amongst us have reported sharp drop in business and also reported losses in many cases. This has led people to believe that probably companies involved in e-commerce are just not in favour any more. Post normalcy, markets believe that the business model of these e-commerce companies is under tremendous pressure. Shares from these sectors have lost big time in the US and part of the meltdown is visible even in India.

FIIs are busy encashing gains in India so that they are able to reduce their overall exposure at a time when global markets are under pressure. With Indian markets still giving positive returns, sales here are of the first priority. How long and up to what level would be debatable.

Domestic funds have been able to keep pace with sales so far. Whether this would continue indefinitely is not sure. The positive fact however remains, post Covid-19 the new investors who have come to the markets are giving substantial muscle power to domestic funds and helping in facing the onslaught. Every person has his day, and its not far before the day would come where domestic institutions would sell shares to FIIs and FPIs on their terms and conditions.

In this global meltdown, even the Indian Rupee has held its ground quite well. While we have lost some ground against the Dollar, we have gained against quite a few other currencies including the pound and the euro. In the current Russia-Ukraine war, we have managed our oil purchases quite well and a good crop is helping in this world food crisis.

What next? Expect FIIs to stop selling sooner than later and look at Indian equities all over again. The reducing differential between interest rates would be another reason to look at the country. Further the fact that India has one of the best growths amongst global economies is yet another reason.

I strongly believe that before the calendar year is over, FIIs will be back on a buying spree in the country. Wait for that to happen and see the markets gain.