FIIs have been net sellers in equities for the third consecutive session and so far in June. They have sold a little over Rs 5,000 crore in the last two trading sessions and over Rs 10,000 crore in the last three sessions. Given the negative bias in the market in the past few days, the FII action has also led to some buzz about valuation worries in the Indian market.
Market veteran Arun Kejriwal pointed out that, “Valuation wise- it is not that there are no concerns, but these concerns have surely reduced after the Q4 results. If you see the Q4 performance, especially for large caps, it is particularly encouraging. The valuation metrics have improved post Q4. One must not read too much into the current selling seen as this also accounts for the recent spate of block deals in the market. FIIs are also using this current phase as an opportunity to book profit, wherever possible. Long-term, there is no big worry.”
Why are FIIs selling for past two sessions?
In fact, most market observers believe the global headwinds are impacting the direction of flow for Foreign Institutional Investors more than valuation worries. Market expert, Ajay Bagga pointed out that the current outflow is more due to, “promoter selling via block deals as well as US Universities facing a funding cut and taking back invested funds. Even markets like South Korea and Japan have seen outflows . The Indian valuations are not an issue given the growth perspective. The FPI selling is more due to block deals by promoters using the market recovery to sell some stake and also some tactical liquidity generation.”
Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services, added that it is hard to pinpoint the exact tigger, “There are several factors impacting FII flows to Indian equity market. Global negative factors, impending talks between US President Donald Trump and Chinese President Xi Jingping and fresh tariffs on aluminium and steel sectors also weighed on sentiment. That apart, we have also seen some profit-booking after Q4 numbers. That also played a role in determining the direction of FII flows in India.”
Advantage EMs, India a key destination
For the longer term though, most experts are confident about flows to India as part of the overall higher flows to Emerging Markets. According to Bank of America Securities, as shared on Reuters, Indian markets are likely to be among the top three Asian markets that the are set to attract foreign inflows once tariff-related uncertainties ease. Analysts at BofA Securities told Reuters. “Within Asia, India should be one of the best markets for investments as they have a lot of drivers for growth which other markets do not,” However, in the near term, analysts see little upside in the risk-reward balance in Indian equities.
Weak dollar positive for flows to EMs
One must also keep an eye on the relative dollar movement. The dollar Index has been hovering just above the 99 mark after slipping below that to 98.71 on June 2.
Bagga explained that “a weaker US dollar is normally inversely correlated to EM flows, hence we are positive on FPI flows sustaining going ahead. EMs have underperformed for multiple years, and a pivot away from US exceptionalism on the back of the US policy chaos, will benefit EMs within which India has an 8-10% share of flows.”
The FII outflows peaked in the last quarter of 2024 and this was also the time when the Dollar Index started rising. The Dollar Index hit a high of 110 in January this year and since then has been trending lower. We have also seen flows moderating as the Dollar Index slipped to the key 100 mark. It is now down nearly 9% so far this year so far.