Forget Fed, even war hasn’t spooked DIIs as FIIs sell stocks worth Rs 1.6 lakh cr in 7 months

Not anymore, if the last seven months are anything to go by.

Foreign institutional investors, which have been net sellers of Indian equities every month since October 2021, have renewed that selling pressure after a brief bout of buying earlier this month.

The outflows from equities – Rs 1.6 lakh crore since October 2021 – mark the largest selling spree by FIIs since the Global Financial Crisis of 2008.

However, benchmark equity indices have displayed a remarkable degree of resilience in the face of such a rapid exit of overseas funds.

The Nifty50 and the BSE Sensex have shed a mere 4 per cent and 3 per cent, respectively, since October 2021, which was also the month when the two headline indices hit lifetime highs.

So far in 2022, the two indices have given up around 2 per cent.

What is striking is the fact that the FII exits from equities are not being driven by transient trading views but rather events that have altered the global macro-economic landscape.

“The global investing scenario has been plagued by the risk-off trade since October 2021, as central bankers hinted at policy tightening with inflation moving from being “transitory” in nature to somewhat of a medium term headache,” Axis Mutual Fund said.

The Federal Reserve is set to embark on an aggressive rate hike plan while sharply reducing its balance sheet in order to reverse the massive amounts of liquidity it pumped into the country’s markets during the first two years of the pandemic.

A portion of the easy liquidity also found its way to emerging markets such as India, propping up share prices.

Secondly, the magnitude of disruptions caused to global commodity supply chains by Russia’s invasion of Ukraine point to the likelihood of the prices of many of those commodities remaining elevated. India, being heavily dependent on crude oil imports stands to suffer on both the inflation and current account fronts.

Yet, domestic institutional investors continue to absorb the massive selling from foreign investors.

“The ongoing FPI selling in Indian equities is turning out to be the highest selling spree (TTM – trailing twelve months- FPI cumulative selling of US$36bn) since the global financial crisis (GFC) of CY08 (US$28bn),” Axis Mutual Fund wrote.

“However, the impact on benchmark indices (NIFTY50, Nifty Midcap, Nifty Smallcap) is much lower compared to GFC and other instances of risk-off environment seen in CY13, CY16, CY18, etc., which led to FPI outflows. Especially for mid and small cap indices, the sensitivity to FPI outflows of such magnitude has been considerable in the past.”

Interestingly, so far in 2022, the BSE Smallcap index has actually gained 4 per cent, while the Midcap index has declined a mere 2 per cent.

“This time around though, there seems to be a semblance of domestic strength in ultra-stressed times. The Indian markets have been relatively immune to the global devastation wrought on currencies, equities and bonds this time around, compared with similar stresses in the past,” Axis Mutual Fund wrote.

The fund house highlighted a sharp increase in domestic participation along with a structural rise in investment flows into SIPs as the key positive drivers.

Investors poured in a net Rs 28,463.4 crore in equity oriented funds in March, compared to Rs 19,705.27 crore in February, latest data released by the Association of Mutual Funds in India said.

Thanks to consistent investments made by investors, domestic institutional investors, which mostly comprise mutual fund managers, bought stocks worth Rs 39,677 crore during the month, against buying of Rs 42,084.07 crore in February.

In a note released last month, ICICI Securities said that over a trailing 12-month period, domestic institutional investors have poured in funds worth $27.9 billion.

Aggregate FII holdings of domestic equity assets were at Rs 45.5 lakh crore as on February 28, representing 18 per cent of aggregate listed stocks, down from 20 per cent as on March 31, 2021, the brokerage said.

“Such behavior of aggressive buying during declining stock prices by domestic investors should result in improved long-term outcomes for their portfolios vs buying in a high-optimism phase of the market, and thereby setting off a virtuous cycle,” Axis Mutual Fund said.

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