When Will FII Selling Abate?

The frontline equity indices in India have receded by nearly 4 per cent since reaching their lifetime high in mid-September. Despite this decline, India continues to be among the top-performing global indices within major economies. The recent downturn can be attributed to sustained selling by foreign institutional investors (FIIs) with ₹45,122 crore worth of domestic equity offloaded from September until now. The cautious stance adopted by foreign institutional investors stems from the global scenario, making them net sellers for the third consecutive month, until November 10. 

A crucial factor contributing to this exit is the 10-year yield spread between India and the US, currently at a 17-year low of 2.4 per cent. This implies that FIIs find less incentive to invest in emerging markets. Historically, whenever this gap widens, we witness increased FII investments in the Indian equity market. For instance, in the fiscal year 2020-21, post the corona virus pandemic, when the US interest rate was virtually zero and the yield rate difference between the two countries was around 4.4 per cent, FIIs invested ₹2.74 lakh crore in the Indian equity market. 

Considering the inflation trajectory in both India and the US, it is anticipated that the gap between the two may further reduce, potentially accelerating outflows. Moreover, the looming state and general elections over the next 6-8 months may heighten political uncertainty, impacting FII inflows. Consequently, we might witness subdued activity from FIIs unless there’s a significant downturn in US inflation and bond yields. However, this doesn’t necessarily imply that the Indian equity market will languish during this period. There are reasons for confidence. 

Firstly, domestic institutional investors have remained robust, absorbing almost all FIIs outflows. Despite a total outflow of ₹45,122 crore (FII selling), mutual funds alone have invested more than ₹50,000 crore in the same period. Secondly, the ongoing September quarter earnings’ season has seen results largely meeting expectations. Earnings’ growth – particularly in sectors such as banking, financial services and insurance, automotive and capital goods – has been better.

And although IT companies have failed to impress the markets, FMCG companies have witnessed growth in mid-single digits and are likely to improve going ahead. Overall, Nifty EPS estimates remain stable, and post the recent correction the valuations also do not appear excessively expensive. In this special issue we are spotlighting the backbone of the Indian economy—banking. With meticulous attention, we have curated a selection of over 30 parameters encompassing growth, efficiency, size and asset quality to identify the bestperforming banks based on various criteria. 

Our analysis delves into both public and private banks, offering insights into their performance across different metrics and a snapshot of their share price movements over the past year. In the last few years, there has been a remarkable growth in derivatives trading in India. Unlike many markets where derivatives volumes are 5-15 times their cash market counterparts, India stands out with derivative volumes exceeding 400 times that of the underlying cash market. The total derivatives volumes have surged to over USD 4.3 trillion per day. The not so happy part of this development is that the market share of retail investors in equity derivatives for April to August 2023-24 is pegged at 27 per cent, with many struggling to turn a profit or experiencing losses.

In response to this, the Securities and Exchange Board of India (SEBI) took action in May by mandating brokers to display a warning on their websites and on each derivatives order, cautioning retail investors about the risks associated with derivatives trading. One of our special reports delves into the continued challenges and offers insights into how investors can utilise ‘delta hedging’ to effectively manage risk in derivatives—a timely guide in the evolving landscape of derivative trading. Hope you will enjoy all the stories and gain valuable insights to become a better investor.

RAJESH V PADODE
Managing Director & Editor