Foreign Portfolio Investors Turn Net Sellers In August After 2 Months Of Buying; What Triggered FPI Selling?

August 2024 marked a shift in the behaviour of Foreign Portfolio Investors (FPIs) in Indian equities, ending a two-month buying spree and turning into net sellers. After consistent buying in June and July, FPIs offloaded Rs 13,431 crore worth of Indian equities, raising concerns about whether this is a temporary pause or a signal of a more cautious approach towards Indian markets.

FPI Selling in August

The National Securities Depository Ltd (NSDL) data reveals that FPIs turned net sellers in Indian equities as of August 9, 2024, with a total outflow of Rs 3,431 crore. Despite this equity sell-off, the net investment for the month stood at Rs 7,044 crore, thanks to significant inflows into debt markets. FPIs poured Rs 6,261 crore into debt instruments.

This selling activity comes after a robust inflow of Rs 32,365 crore into Indian equities in July, highlighting a sudden change in sentiment. The selling has raised questions about the sustainability of FPI inflows and their impact on the broader market.

The Indian equity markets responded to the FPI selling with increased volatility. The benchmark indices, Nifty50 and Sensex, experienced profit booking for the second consecutive week in August, as disappointing economic data from the US and the unwinding of Yen carry trades dampened investor sentiment.

Nifty50 ended the week at 24,367.50, down 1.42%, while Sensex settled at 79,705.91, down 1.58% from the previous week. The market's initial dip to six-week lows was quickly followed by a sharp rebound, reflecting the "Buy the Dip" strategy that has become prevalent among investors amid an overall bullish market outlook.

"The formation of a Hammer candle on the weekly charts for the Nifty index suggests a potential upside in the coming week, following a thousand-point contraction from its life highs. The market structure remains strong, and we may see a move towards the 25,000 mark if the index breaks the 24,400 resistance level," said Arvinder Singh Nanda, Senior Vice President of Master Capital Services Ltd.

Nanda also highlighted the Nifty Bank index's formation of a Doji candle, indicating a possible reversal. With strong support near 49,900, backed by the 100-day EMA, the index may witness an imminent upmove. Resistance is seen at 50,400, and sustained trading above this level could push the index towards the 51,000-51,200 range.

FPI Activity

The FPI activity in 2024 has been marked by significant fluctuations, influenced by various global and domestic factors. In July, FPIs injected Rs 32,365 crore into Indian equities, building on the momentum from June, when they reversed a two-month selling streak to become net buyers with an infusion of Rs 26,565 crore.

The turnaround in June was driven by the stabilization of the Indian markets after the uncertainties surrounding the 2024 Lok Sabha elections had dissipated. The return of market stability, coupled with favourable economic indicators, encouraged FPIs to increase their exposure to Indian equities.

However, this optimism was short-lived. The selling in August follows a pattern seen earlier in the year. In May 2024, FPIs offloaded Rs 25,586 crore worth of Indian equities, driven by concerns over high US bond yields, elevated Indian market valuations, and the outperformance of Chinese stocks. The selling pressure in May was a stark contrast to March 2024, when FPIs had pumped Rs 35,098 crore into Indian equities, marking the highest inflow in the first three months of the year.

The volatility in FPI activity can be attributed to a complex interplay of global and domestic factors. High US bond yields have consistently posed a challenge, making Indian equities less attractive on a relative basis. Additionally, the performance of other emerging markets, particularly China, has influenced FPI decisions.

Domestic Institutional Investors

While FPIs have been net sellers in August, Domestic Institutional Investors (DIIs) have continued their buying streak, providing much-needed support to the Indian markets. DIIs acquired approximately Rs 23,500 crore in the cash segment so far in August, with Rs 20,871.10 crore of purchases made in the week alone.

The contrasting behaviour of FPIs and DIIs highlights the resilience of domestic investors, who have stepped in to fill the gap left by foreign sellers. This dynamic has helped cushion the impact of FPI outflows on the broader market, preventing a more severe correction.

The key question now is whether the FPI selling in August is a temporary blip or the start of a more prolonged trend. Several factors will influence this, including the trajectory of US interest rates, global economic conditions, and the performance of other emerging markets.

FPIs have historically been sensitive to global cues, particularly US monetary policy. Any signs of further rate hikes by the US Federal Reserve could lead to continued outflows from Indian equities. Conversely, if the Fed signals a pause or potential rate cuts, we could see a reversal in FPI behaviour, with fresh inflows into Indian markets.

On the domestic front, the Indian economy's performance, corporate earnings, and policy measures by the Reserve Bank of India (RBI) will play a crucial role in shaping FPI sentiment. The RBI's decision to maintain the benchmark policy rate at 6.5% in its August meeting suggests a cautious approach to monetary policy, balancing the need to control inflation with the desire to support economic growth.

The FPI selling in August 2024 has undoubtedly raised concerns, but it is essential to view it in the broader context of a volatile global environment. While the immediate outlook may be uncertain, the resilience of domestic investors and the underlying strength of the Indian economy provide reasons for cautious optimism.