FII selling crosses ₹2 trillion in FY25, may cross FY22 record

Investors exiting India have net-sold over ₹2 trillion worth of shares this fiscal, setting the stage for what could be the worst year for foreign portfolio outflows on NSE's secondary market.

As US bond yields rose and quarterly earnings disappointed amid lofty valuations, foreign institutional investors (FIIs) net-sold a record ₹1.17 trillion in the secondary market in NSE's cash segment in October. This brings total outflows for the fiscal year till 31 October to ₹2.02 trillion. Going by November's overall cash market sales, it could cross FY22's record ₹2.8 trillion outflows by the end of the fiscal year.

Market experts said that if rising US yields spark outflows from emerging markets (EMs) to the US, that will hit India to the extent of its weight in the MSCI Emerging Market Index. As of 31 October, India's weight in the index was 18.84%, behind China's 27.38% and Taiwan's 19.05%.

"While India's structural story is intact, in the run-up to and aftermath of the US presidential elections, dollar bond yields have risen, and the greenback has strengthened, resulting in EM outflows," said Nitin Jain, chief investment officer & chief executive officer, Kotak Mahindra Asset Management (Singapore). “Consequently, India, being part of the EM basket, has faced selling pressure.”

Jain believes the dust will settle once Donald Trump takes helm at the White House and greater clarity emerges on trade policies, especially tariffs. He said the FII selling in October could taper in the second half of the fiscal, with valuations, though still pricey, having corrected after the recent market pullback. He said earnings growth could improve in the second half, thanks to higher government spending and consumer demand, as well as the wedding season.

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While the Nifty has fallen 7.69% from its record high of 26211.35 on 27 September to 24194.5 as of Tuesday, it trades at a one-year forward price to earnings multiple of 19.58, against its two-year average of 19.3 times.

Corporate earnings in the September quarter were tepid, with aggregate net profit of 3,000 companies growing a minuscule 1.43% year-on-year to ₹3.28 trillion. In the year-ago quarter, aggregate profit had grown 36.57% to ₹3.24 trillion.

Bond yields in the US are up from 3.7% on 1 October to 4.29% now, on expectations of rising inflation from planned tax cuts and rising tariffs in a Trump presidency. Over the same period, the dollar has strengthened by 0.62% to 84.34 on the back of FII selling since October.

To be sure, on Monday, FIIs net purchased shares worth ₹9569.55 crore, primarily because of MSCI EM index rebalancing, depository data showed. On Tuesday too, FIIs purchased a provisional ₹1157.7 crore as per BSE data, after largely selling since October.

Outflows on NSE's cash market this fiscal till October end far exceeded the ₹15,468 crore selling in FY24. While NSE's cash market data for November will be released next month, cash market sales for both NSE and BSE so far this month stand at ₹31,271 crore through 25 November.

NSE sees greater FII participation than BSE, given that its market share on a three-month rolling basis on the equity cash segment stands at 93.2% as of October, with BSE accounting for the rest.

Also read | Record FII exodus shakes India’s stock markets even as domestic funds step up

According to Swarup Mohanty, vice-chairman and CEO of Mirae Asset Investment Managers (India), FII selling would taper if the government spending rises in second half and corporate earnings improve. While there is a definite slowdown in urban consumption this year because of the binge buying post-covid, rural consumption could pick up and offset the slowdown in urban pockets, he said.

"While there is no doubt among global investors on India's long-term growth prospects, near-term hiccups have risen because of rising dollar bond yields and tepid earnings growth of India Inc., which will have to pick up in the forthcoming quarters to stem outflows as valuations in pockets of the market still remain high," Mohanty explained.

FIIs in primary market

NSDL data shows that FIIs invested ₹2.74 trillion in the primary market (IPOs, QIPs, preference and rights issuances, etc) in FY21, sold ₹1.4 trillion and ₹37632 crore in the next two fiscal years, purchased ₹2.08 trillion in FY24, and net purchased ₹63,006 crore in the current fiscal through October. Some of this primary market buying offset the selling in the cash or secondary market. FIIs' total India equity assets as of 15 November stood at $824 billion.

And read | FIIs pulling out of India is not a surprise. But where is their money going?