FPIs offload ₹22,420 crore from Indian equities in November: 5 key factors behind sell-off

Foreign portfolio investors (FPIs) extended their robust selling streak in Indian markets in the first fortnight of this month, amid the uptrend in the US market and US bond yields, which was fueled by Republican Donald Trump's victory in the US presidential elections and the latest US Federal Reserve's interest rate cut verdict. However, the US Fed has clarified that it is no hurry to cut rates.

FPI sell-off hit a record high in October amid ongoing geopolitical tensions in the Middle East and cheaper valuations in the Chinese stock market. FPI outflows recorded in October were the highest ever in a single month in Indian markets. FPIs turned net sellers in October after a sharp U-turn over global cues.

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According to the National Securities Depository Ltd (NSDL) data, FPIs offloaded ₹22,420 crore worth of Indian equities, and the net outflow stood at ₹26,343 crore as of November 15, taking into account debt, hybrid, debt-VRR, and equities. October's FPI outflow hit a 10-month high, the highest sell-off from the Indian market YTD. The total debt investment was ₹362 crore.
 

Why are FPIs consistently selling Indian shares: Here are 5 key factors

1.Primary market inflows

According to Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, FPIs have been continuing with their massive selling of ₹1,13,858 crore in October with another ₹22,420 crore in November through 15th. Two factors in the FPI selling stands out: 

Firstly, FPIs continued to buy in the primary market ( ₹9,931 crore) while selling in the cash market through exchanges ( ₹32,351 crore) resulting in a net sell figure of ₹22,420 crore through 15th in November.

Also Read: Relentless FPI selling triggers ₹27,680 crore outflow from Indian equities in November
 

2.Sell-off in debt market

Second, FPIs have been selling in the debt market too with the sell figure reaching ₹4,717 crore through November 15th," added Dr. V K Vijayakumar. The relentless FPI selling has been triggered by the cumulative impact of the high valuations in India and concerns regarding the earnings downgrade. 

3.Weak corporate earnings, high valuations

According to Dr. V K Vijayakumar, the rationale for the FII selling is the elevated valuations in India, which appear conspicuous in the earnings deceleration evident in the Q2 numbers. The FII selling trend will likely continue until data indicate the possibility of a trend reversal. If the Q3 results and leading indicators reflect a recovery in earnings, the scenario can change with FIIs reducing selling and even turning buyers.

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4.Donald Trump's poll victory

According to the market expert, Trump's victory has impacted the US equity and bond markets. Benchmark indices have boomed on expectations of the positive impact of Trump's promised corporate tax cut and pro-business policies. 

Concerns about the potentially rising fiscal deficit under Trump have impacted the bond market. The sharp up move of the 10-year US bond yield to 4.42 per cent has negative implications for emerging markets, which is also reflected in the FPI selling in the debt market.

5.Sell-off in specific sectors

FPIs have been reducing their weightage in mature sectors this calendar yearwhen growth would be closer to our nominal gross domestic product (GDP) and allocating capital to high-growth businesses. “For example, in the financial sectors, FPIs have been increasing allocation in capital market themes like asset management, exchanges, and healthcare,” said Vipul Bhowar, Senior Director Listed Investments, Waterfield Advisors.

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FPI withdrawals can impact automobiles, metals, and construction. Concerns over global commodity prices and economic slowdowns drive rising costs and changing consumer preferences. The construction sector is particularly sensitive to shifts in government spending and infrastructure projects.

FPI inflow outlook

According to Vipul Bhowar of Waterfield Advisors, while some of the selling by FIIs in the secondary market is being counterbalanced by buying in the primary market—through large initial public offerings (IPOs) like those from Swiggy and Hyundai—it is expected that FIIs will reduce their selling as we near the end of the calendar year. 

Fresh allocations or significant investments are likely to occur once there is greater clarity regarding the Trump administration's policies. The new framework established by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) for reclassifying foreign FPIs as FDIs is expected to impact foreign inflows into India positively. This framework provides greater flexibility for foreign investors and reduces barriers to entry. 

With the new regulations, FPIs can hold larger stakes in Indian companies without immediate divestment. This creates opportunities for increased foreign investment, particularly in mid-cap companies, and helps attract long-term capital. As these changes are implemented, monitoring their influence on investment patterns and market dynamics will be essential to assess their long-term effectiveness in attracting foreign capital.

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"FPIs are affected by India's economic fundamentals, regulatory changes, market performance, global conditions, and currency stability. Due to geopolitical uncertainties and changing economic landscapes, their activity will likely remain volatile. The upcoming large IPOs may briefly increase investments in the primary market, but ongoing interest will depend on macroeconomic stability and corporate earnings performance," added Bhowar.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.