FPIs offload ₹85,790 crore in Indian equities: Sell-off hits 10-month high on shift to China stocks; What next?

Foreign portfolio investors (FPIs) extended their robust selling streak in the Indian market, taking a sharp U-turn in October to turn net sellers amid the ongoing geopolitical tensions and cheaper valuations in the Chinese stock market. This comes after an aggressive buying streak recorded in September when FPI inflows were the most year-to-date (YTD), hitting a nine-month high after the supersized 50 basis points (bps) interest rate cut by the US Federal Reserve.

According to the National Securities Depository Ltd (NSDL) data, FPIs offloaded ₹85,790 crore worth of Indian equities, and the net outflow stood at ₹89,977 crore as of October 25, 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. In October, the total debt investment was ₹410 crore. 

Notably, FPIs made a remarkable comeback to Indian markets in September, snapping their previous moderation, driven by domestic and global factors. They were consistent buyers in June and July after the election-related jitters faded and stability returned to Indian markets. However, FPIs had paused their buying streak with the onset of the new fiscal year 2024-25 (FY25).

Also Read: FPI selloff in Indian stocks hits ₹82,000 crore in October, highest-ever in a month. Is only the China factor at play?

FPIs turn net sellers in October: What triggered the sell-off?

FPIs were sellers on all days in the cash market until October 24. This month, the cumulative FPI selling in equity through the stock exchanges stood at a massive ₹1,02,931 crore through 24. However, FPIs were buyers in the primary market and bought shares for ₹17,145 crore during this period. Some large IPOs enabled the primary market investment. The net of the primary market purchase is the total FPI sell figure, which stands at ₹85,790 crore.

D-Street experts say the trend of sustained FPI selling, which started in early October, continues and shows no signs of reversal soon. “The Chinese stimulus measures and the cheap valuations of Chinese stocks triggered the current wave of FPI selling. The elevated valuations in India made India the top choice of FIIs to sell,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Also Read: FPI Exodus in October: Financial Services, Oil & Gas, Auto sectors hit the hardest so far

Sustained FPI selling impacted market sentiments, pulling the Nifty 50 index by eight per cent from the peak. “FPIs will likely continue selling in the near term since the market sentiment has turned weak due to the escalation of tensions in the Middle East and the uncertainty regarding the outcome of the US presidential elections,” said Dr. V K Vijayakumar.

The fundamental trigger for the FII outflows is the elevated valuations in India and the relatively cheap and attractive valuations in markets like China and Hong Kong. The FII selling is getting aggravated by news of a slowdown in corporate earnings. The market's uptrend is incompatible with a downtrend in earnings growth. 

What should investors do amid FII outflows?

The only positive factor is the sustained flow into mutual funds, which helps domestic investors absorb the massive FII selling. “This can provide resilience to the otherwise weak market, where there is no valuation comfort, except in pockets like large-cap financials even after the eight per cent correction. Growth stocks are likely to be more resilient in this market where value is hard to come by," said the analyst.

Also Read: FPIs take U-turn in October, offload ₹27,142 crore in Indian equities: Here’s what triggered the sell-off

Therefore, the market is witnessing selling at every rise, turning the near-term market structure into ‘sell on the rally.’ Experts say investors must be cautious at this juncture and refrain from chasing temporary rallies. High-quality financials and IT stocks can be bought on dips, and digital stocks that continue to show acceleration in growth can be gradually accumulated on declines.

"Nifty will likely test its 200-DMA around the 23400 level, with a potential rebound expected after the October expiry. However, continued pressure is anticipated in the midcap and small-cap sectors. Investors should consider using this dip as an opportunity to buy quality large-cap stocks, especially in the financial sector, where valuations remain attractive," said Santosh Meena, Head of Research at Swastika Investmart.

FPIs inflow outlook

The monetary and fiscal stimulus implemented by the Chinese authorities is expected to stimulate the Chinese economy and the Chinese stocks listed in the Hong Kong market. If the outperformance of Hang Seng continues, more funds may flow to Hong Kong since that market continues to be very cheap.

Also Read: FPIs dump Indian stocks for 11th straight session, withdraw ₹73,000 crore

“If the momentum in Chinese stocks continues, FIIs may continue to sell in India, where valuations are elevated. It remains to be seen how long the optimism lasts. Massive FII selling in financials, especially frontline banking stocks, has made their valuations attractive. Long-term domestic investors may utilise this opportunity to buy high-quality banking stocks,” added Dr. V K Vijayakumar.

Experts remain concerned that the market will overheat and valuations will be stretched. Analysts added that the Indian markets reflected their resilience positively based on the strong fundamentals and robust economic performance at the expected economic growth.

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.