Why Foreign Institutional Investors Are Selling Shares In Indian Equity Markets

The Foreign Institutional Investors (FIIs) have been continuously selling shares in Indian markets. The FIIs have so far this year sold shares worth Rs 1,64,118 crore, data from National Securities Depository Limited (NSDL) showed. The FIIs have been aggressively selling Indian equities since the benchmarks touched record highs in October last year.

The selling by FIIs is being absorbed by the Domestic Institutional Investors (DIIs) and retail individual investors, analysts said.

What Is Leading To Outflows By FIIs?

The relentless selling by FIIs is on the back of rising inflation globally which has led to spike in interest rates and in turn led to jump in bond yields in US and other developed markets. Spike in bond yields drives away money from emerging markets like India into the US bonds, analysts said.

Inflation soared over the past year at its fastest pace in more than 40 years, with costs for food, gasoline, housing and other necessities squeezing American consumers and wiping out the pay raises that many people have received.

The US Labor Department said that its consumer price index jumped 8.5 per cent in March from 12 months earlier, the sharpest year-over-year increase since 1981.

Rich valuations which the markets were commanding last year when index was trading at record highs is also a major factor for their withdrawal from Indian equities, explained AK Prabhakar, head of research at IDBI Capital.

The Sensex in October touched price-to-earnings (P/E) ratio of 31 times and Nifty touched P/E ratio of 28.17 times, stock exchange data showed.

“They have been investing in Indian markets since last 20-25 years and now they are withdrawing money because valuations have become expensive for Indian markets,” Prabhakar told Outlook Business. 

“Liquidity is drying up, interest rates are going to move higher and they have to safeguard their money because once everyone will start pulling money rupee will become weaker and when rupee is stable they have to take out the money and they have been systematically withdrawing money since last year once market corrects they will come back to Indian markets,” Prabhakar added.

Back home, FII outflows have coincided with sharp decline in the benchmark indices. The Sensex and Nifty have corrected nearly 8 per cent year-to-date since the start of 2022, data from stock exchanges showed.

Many stocks have seen a deeper correction with some shares down 30-40 per cent from record highs tested in October last year.

Many shares have corrected 40-50 per cent from their recent highs and have already entered the bearish phase, Rahul Shah, Co-head of Research at Equitymaster, said.

Some shares that have fallen between 30-50 per cent include Punjab National Bank, RBL Bank, Rain Industries, SAIL, India Cements, Granules India, Torrent Power, Apollo Hospitals, Bajaj Finserv, Godrej Properties, DLF, Tata Motors, Exide Industries, Hindalco, L&T Infotech and L&T Technology Services.