FIIs or foreign institutional investors make up a substantial investment population in Indian companies, despite the cut-offs and ceilings mandated by the Reserve Bank of India. Although any FII investment is great news for an Indian company, the sale of such an investment is not such good news. With FIIs, analysts report that the beginning of 2023 has not got off to a flying start. However, there are some reasons why FIIs are selling investments rather than buying into new ones.
Why FIIs are Selling - Media Reports
Reports that were generated at the beginning of 2023 seemed dismal where FII investment was concerned. It was reported that FIIs offloaded nearly Rs. 5,000 crore worth of investments in just a few sessions of trading. This trend has continued since December 2022. The reason? Analysts believe that FIIs, although still interested in India’s booming economy, chase assets which tend to be undervalued in other places.
What drives FII behaviour?
Reasons why FIIs are selling in the Indian market could be attributed to some apprehension about global markets in general. To start with, there was a strong wave of FII buying in November 2022. This was followed by a spurt of selling. News had just broken out, which may have prompted this behaviour - a recurrence in cases of Covid-19 in China. In December of 2022, FIIs made sales of shares worth a whopping Rs. 14,231 crores, when in the previous month they had invested above Rs. 22,000 crores in the market. What is the effect of this offloading of shares by FIIs?
The Selling of FII Investment
When FIIs sell their market investments, it means that liquidity is being pulled out of the market. As a result of such actions by FIIs, the NIFTY 50 and SENSEX 30 benchmark indices have witnessed a reduction of up to 2% at the start of 2023. As February was upon us, the trend of pulling out of the Indian stock market continued as over Rs. 3,000 crore worth of shares were pulled from FII investment. While India is feeling the drag of this, other Asian markets, like China, South Korea and Hong Kong are doing relatively well. This means that FIIs feel that Indian markets are overvalued and would rather opt out and buy into other more undervalued markets.
Other reasons why FIIs are selling have to do with global central banks raising interest rates to mitigate the effects of inflation. The depreciating rupee may be another reason, but one could argue that FIIs pulling out of Indian markets has led to this rather than caused it. The major fears that all investors have experienced in the last year are those that have to do with inflation and fears of recession.
The Effect of FII Sellout on Sentiment
Once you have understood why FIIs are selling, you will probably understand why other related circumstances have evolved. If you are an investor in shares, you know that market sentiments play a huge role in the value of stocks and markets in general. This has a trailblazing effect on the economy. As market sentiment drops to lows as FIIs pull out, the Indian rupee also goes through a drop in value relative to the American dollar. Another and more pertinent effect of the outflows of FIIs, combined with the rate hike by the Reserve Bank of India, is the negative influence on the currency of India.
Some Optimism
Knowing why FIIs are selling in the Indian market is one thing that informs investors about how markets and the financial scenario in India stand. While everyone in the financial space knows how much FIIs love to invest in India, economists and analysts are somewhat perturbed by the selling of shares across all categories. This is not surprising as one of the main forces taking the Indian stock markets high is foreign investment. Moreover, historically, whenever Indian markets have crashed, or sharply risen, FIIs have been among the primary reasons.
While all this may make certain analysts anxious, investors are rising to the occasion and DII investment is on the rise. More and more retail investors are entering the stock market and investment is increasing. Through mutual funds and direct investments, retail investors have been overtaking FII investment to start with. However, this doesn’t mean that FIIs leaving doesn’t have an adverse impact. They do. When FIIs purchase and sell in massive quantities, the markets cease to move until investors are done investing. Still, most Indians have optimism that with more DII (domestic institutional investors) and retail investors pumping large amounts into the market, the markets will soon get over large foreign selloffs.
The Silver Lining
For years, FIIs have been known to be the drivers of certain stocks growing in value. Over benchmark indices, their dominance may have lessened and this may be a cause for Indian investors to invest with a vengeance. Right now, China has opened its doors to investment after a long hiatus. However, analysts feel that Indian investment will always be on the minds of FIIs in the long run.