FPIs Sell Big, But Indian Market Stays Resilient Amid Global Uncertainty

Foreign portfolio investors (FPIs) continued their selling spree in the third week of October, driven by a sharp spike in US bond yields and geopolitical tensions in the Middle East. According to data from the National Securities Depository Ltd (NSDL), FPIs have sold Rs 12,146 crore worth of Indian equities and offloaded a total of Rs 6,555 crore as of October 20. While this trend has raised concerns, experts note that the Indian market remains remarkably resilient.

The Rs 12,146 crore figure includes bulk deals and investments in the primary market, with the selling by FPIs in the cash market being even higher at Rs 16,176 crore. This shift in FPI behaviour marked a reversal from the prior three-month trend of sustained buying, and the primary cause of this reversal has been the surging US bond yields.

Federal Reserve Chairman Jerome Powell's recent statement played a crucial role in this extended selling streak. Powell highlighted that more interest rate hikes might be necessary to bring inflation down to a 2% target, citing a tight labour market and a resilient US economy. This sent shockwaves through global financial markets, prompting FPIs to reassess their positions in India.

In India, FPIs have been selling across various sectors, including power, financials, fast-moving consumer goods (FMCG), and information technology (IT). Notably, FPI selling was subdued in the automobile and capital goods sectors, while they emerged as buyers in the telecom sector. This diversification suggests a strategic approach by FPIs, as they navigate the evolving market conditions.

Despite the sustained selling, analysts emphasize that the Indian market continues to exhibit remarkable resilience. FPIs are increasingly concerned that if they continue to sell, they might miss out on a potential rally in the Indian market. This apprehension could act as a restraint on FPIs from selling heavily in the coming days.

Shrikant Chouhan, Head of Equity Research (Retail) at Kotak Securities Ltd, commented, "Flows from foreign institutional investors are expected to remain volatile on increasing concerns about elevated global interest rates, rising energy prices, and a mixed set of corporate earnings print in Q2FY24 so far. Heightening geopolitical tension in the Middle East and US Federal Reserve hinting at more rate hikes may see treasury yields staying higher, which could prompt further foreign fund outflows from emerging markets, including India."

Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlighted the figures, stating, "FPIs continued their selling spree in October with a selling figure of Rs 12,146 crores through the 20th. The selling in the cash market was higher at Rs 16,176 crores. FPIs have been selling across the board in sectors like financials, power, FMCG, and IT. Selling was subdued in automobiles and capital goods. They were buyers in telecom."

The primary reason for the sustained selling has been the sharp spike in US bond yields, taking the 10-year yield to a 17-year high of 5% on October 19. Vijayakumar added, "If the safest asset class in the world, the US bond, yields around 5%, it is rational for FPIs to take out some money."

It is important to note that while FPI selling has been significant, it is not exceptionally large. This means that when market conditions change, capital outflows might be reversed.

Another notable trend in FPI investment is the increasing inflow into the Indian debt market. Market experts attribute this to several factors, including the attractive yields offered by Indian bonds. Earlier in the month, India's benchmark 10-year bond yield experienced its most substantial one-day jump in 17 months. This, coupled with the overall expected rise in bond yields, has led to increased interest from FPIs.

Furthermore, India's inclusion in the JP Morgan Global Bond Index has added to the appeal for FPIs. Some investors are pre-empting the Indian bond buying by the major players, as they seek to diversify their investments amid global economic uncertainty.

Overall, despite the challenges and uncertainties, foreign investors continue to perceive India as the most stable emerging market with the best growth story. The coming months will reveal whether the FPIs' selling spree continues or if market conditions prompt a reversal in capital flows.