Will FIIs Rock the Indian Markets?

The Indian equity market has experienced a sharp decline in recent weeks, particularly during the last week of September and the first week of October. The primary factor behind this fall is the continuous selling by foreign institutional investors (FIIs). As of mid-October, FIIs have offloaded shares worth ₹62,126 crore—the largest sell-off in over four-and-a-half years, second only to the ₹61,973 crore outflow in March 2020 at the onset of the coronavirus-triggered pandemic. From September 27 onwards, the total FII outflow has already crossed ₹73,000 crore.

This raises an important question: Is more selling on the horizon? As of October 14th, FIIs still hold a significant ₹81.4 lakh crore in Indian equities, which accounts for 17.5 per cent of the total BSE-listed market capitalisation. Interestingly, this is one of the lowest percentages of FII holdings in Indian equities in recent years. A closer look shows that about half of the FII holdings are concentrated in just 25 companies, with top names like HDFC Bank, Reliance Industries, ICICI Bank, Infosys and ITC making up around 25 per cent of their total holdings.

These are fundamentally strong companies; we don’t expect FIIs to reduce their stakes here drastically. In fact, in many of these companies, FIIs have actually increased their positions in the past quarter. On the other hand, FIIs hold less than 1 per cent stakes in 762 smaller companies, worth only ₹6,000 crore—too small to impact the market even if sold off significantly. However, there are about 1,000 companies where FIIs hold between 1 per cent and 10 per cent, totalling ₹6.72 lakh crore. These stocks are more susceptible to selling pressure.

That said, the pace of FII outflows has slowed over the past week, and we may soon see some stabilisation or even recovery. Furthermore, the earlier boost FIIs received from China’s policy measures seems to be fading, with a rally in Chinese stocks drawing capital away from the Indian markets. For investors, market corrections are a regular part of the equity cycle. They offer opportunities to rebalance portfolios, buy quality stocks at lower valuations, and focus on the long-term potential of the Indian economy.

Given that Nifty 50 has surged over 200 per cent since the pandemic lows of March 2020, short-term volatility shouldn’t deter long-term investors. Our cover story this month offers insights on how to navigate through the ongoing market correction. In our special report, we also explore how to position your portfolio in a falling interest rate scenario. While the Reserve Bank of India (RBI) hasn’t yet cut rates, global trends suggest that major economies are leaning toward rate cuts to stimulate growth. As inflation in India moderates and growth stabilises, the RBI may eventually follow suit.

Investors should prepare for a falling rate environment by focusing on sectors that benefit from lower borrowing costs, such as real estate, infrastructure and financials. This month, we also take a deep dive into the capital goods sector—a crucial driver of India’s economic engine. Key industries within this sector – such as power generation, construction and manufacturing equipment – are preparing for the next wave of growth. With the government prioritising infrastructure development and increasing the demand for advanced technology across industries, capital goods companies are poised to benefit from both domestic and export opportunities. While corrections like the current one are inevitable, long-term investors should remain focused on the bigger picture. The growth potential of the Indian economy remains strong, and adjusting portfolios in response to evolving market conditions—while maintaining a long-term perspective—will ensure that investors are well-positioned for future gains. This issue offers a comprehensive guide to not only surviving but thriving during this period of market uncertainty. Stay the course and keep your sights on the long-term rewards.

RAJESH V PADODE
Managing Director & Editor