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

Foreign portfolio investors (FPIs) continued to withdraw funds from the Indian market for the 33rd consecutive session on Wednesday, pulling out an additional ₹2,502 crore from Indian equities. This brings the total outflows for November to ₹27,683 crore, according to the latest Trendlyne data.

The ongoing sell-off by FPIs is putting considerable pressure on Indian stocks, driving the benchmark indices into correction territory on Wednesday. Mid- and small-cap stocks are bearing the brunt of the downturn, with more pronounced declines in these segments.

While foreign investors have turned bearish on Indian stocks, domestic institutions have stepped in to absorb the selling pressure, injecting billions into the market. Despite these efforts, the market continues to slide, signalling that substantial selling activity persists.

The strong FPI inflows into Indian equities, which followed the US Fed's aggressive 50 bps rate cut in September, quickly reversed in the subsequent month. In October, FPIs remained net sellers in every trading session, pulling out a record ₹1.14 lakh crore worth of Indian stocks through exchanges.

As FPIs restlessly sold Indian stocks in October, both the Nifty 50 and Sensex dropped over 6%, recording their worst monthly performance since March 2020.

Valuation concerns drive FPIs away

The shift in FPI sentiment can largely be attributed to the softening September quarter earnings, which appear to have dampened their confidence in Indian stocks. These earnings results, which fell short of expectations, have led FPIs to reassess the valuations of Indian equities.

It seems that they no longer see the stock valuations as being in line with earnings performance, leading them to shift their investments to other Asian markets like China and Hong Kong, where they view valuations as more reasonable, particularly in comparison to the overheated valuations in India.

China's recent stimulus measures have also attracted FPIs, hoping that these new initiatives will help Beijing revive its economy, which has been under pressure following the COVID-19 pandemic.

Fresh challenges add to market uncertainty

What was once a market where investors eagerly bought every dip has now transformed, with investors choosing to sell into rallies instead. In recent instances, every time front-line indices have attempted a rebound, investors have been quick to seize the opportunity to sell, driving indices to hit new multi-month lows. 

Along with the recent challenges of softening Q2 earnings, the slowdown in India's high-frequency economic indicators and elevated valuations, the spike in retail inflation in October—reaching a 14-month high—has added new pressure to the market. This has raised concerns that the RBI may keep interest rates steady in FY25. 

Additionally, uncertainty over the potential implications of a Trump regime in the U.S. for emerging markets is further affecting investor sentiment.

The uptick in inflation has already begun to impact urban India, leading to reduced consumer spending, as evidenced by the slowdown in FMCG and automobile sales. Analysts cautioned that if urban growth fails to pick up, it could pose further risks to both earnings and market performance.

"We expect Nov’24 inflation numbers are likely to be closer to 5.3%, and the average FY25 inflation numbers are now trending at 4.8%-4.9%, against RBI 4.5%. Inflation is only likely to dip from January onwards, but this will be driven by base effects. We are now less hopeful of a February rate cut. We believe the first-rate cut is now effectively pushed back beyond Feb'25," said SBI Research in its latest Ecowrap report.

"We expect the rate cut cycle to start in early FY2026, even as we expect GDP growth to be lower than the RBI’s estimate," said Kotak Institutional Equites.

Meanwhile, the Indian government spending slowed during April-June due to the national elections, with total expenditure in six months through September at about 44% of the full-year target. Analysts say the weaker spending is one of the reasons for a recent slowdown in India's high frequency economic indicators.

Amid these pressures, the Nifty 50 and Sensex hit a 5-month low in the previous trading session, marking a 10% correction from their record peaks.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.