fii: This one factor holds a clue to when the worst FII selloff might end


NEW DELHI: $39 billion and counting… That’s how much foreign institutional investors (FIIs) have sold in the last nine months, making it the most brutal and longest such selling by them, even worse than the global financial crisis (GFC) of 2008.

This record outflow, which started in October – also the time when benchmarks last hit record highs, has resulted in sharp drawdowns on Dalal Street. One can only thank the resilience of domestic investors who have cushioned the fall, in the absence of which the cuts could have been deeper.

What’s grim for Indian investors is that analysts do not see a reversal in FII outflows anytime soon.

BNP Paribas’ top equity strategist Manishi Raychaudhuri says while FII selling in India is overdone, it is something we have to brace for in the short term.

“There are fundamental reasons behind FII selloff. India was relatively expensive to start with and that has added some kind of fuel to the fire to the current account worsening for India as a consequence of the fuel prices rising and the consequent weakness to the currency,” Raychaudhuri told ET NOW.

As an investor, whose assets are denominated in US dollars or in euro, if you are anticipating the destination currency, in this case the Indian rupee, to depreciate maybe another 3 per cent to 5 per cent, you would obviously hesitate to put money in that market, he explained.

Currently, the Indian rupee trades at record low levels of 78.40 against the US dollar. Higher interest rates in the US and a consequently stronger dollar diminish the appeal of assets in riskier emerging markets such as India. A weaker rupee further erodes FPIs’ returns from Indian assets.

For now, the US Fed is likely to continue with steep rate hikes as suggested by its chief Jerome Powell. He during the Fed rate hike announcement earlier this month suggested that in order to combat inflation, the US central bank could hike the benchmark interest rate by another 0.75 percentage points in July. The Fed raised its benchmark lending rate by 75 bps – the biggest increase since 1994 – in June meet.

Analysts believe that a pause in Fed’s rate hike cycle is essential for FII outflows to reverse.

“Rising inflation and resultant rate hikes by US Fed are the main reason behind the churn of FIIs from emerging markets to developed markets,” said Hemang Jani, Head Equity Strategy, Broking and Distribution,

in an interaction with ET NOW.

FII selling may continue for a while till the aggressive rate hikes by the US Fed comes to a halt, Jani added.

V K Vijaykumar, chief investment strategist at

echoed similar views. He told ETMarkets that as long as the dollar and US bond yields appreciate, FIIs will continue to sell. “They will stop selling only when dollar and bond yields stabilise, which in turn, will depend on US inflation rates and Fed’s policy.”

FIIs’ return holds significance as any signs of a slowdown in selloff or reversal could indicate that the market bottom is likely in place and that D-Street is poised for another leg of the rally.

While it is difficult to predict the exact point when the tide for FII flows will change, ArunaGiri N of TrustLine Holdings suggests that the FII money will come back much sooner than Fed’s timeline for unwinding.

“Not only it will be sooner, but it will be much larger than what went out. This is one reason why some seasoned investors are expecting a melt-up (bull-run) for Indian markets next year (2023),” he wrote in a note last month.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)


Source link