Is the foreign fund exodus slowing down?
Premium- Easing oil prices and the US dollar losing some strength are factors that could prompt FIIs to take exposure to India
Amid elevated global economic uncertainty, foreign institutional investors (FII) fled from the Indian stock markets, but the buying spree of domestic institutional investors (DIIs) contained a steep fall in benchmark indices.
An indicator of this divergence, the FII-DII ownership ratio for the Nifty500 companies has fallen to a multi-quarter low of 1.3x in the June quarter, showed an analysis by Motilal Oswal Financial Services Ltd. This is calculated by dividing the total FII equity holdings with DII holdings in a particular duration.
FIIs sold Indian shares worth more than $28.55 billion in the first half of 2022. But a glimmer of hope is emerging on this front. Although FIIs still remain net sellers, this month until Wednesday, they sold stocks worth $157 million, showed NSDL data. This is miniscule compared to the monthly average of nearly $4.76 billion seen in the previous six months.
“FII outflows that we saw from Indian markets in the first half of the calendar year are over; we do not expect a repeat of that going ahead," said Sahil Kapoor, head of products and market strategist at DSP Investment Managers.
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Easing oil prices and the US dollar losing some strength are factors that could prompt FIIs to take exposure to India, he added. “As for the US Fed, we feel peak hawkishness is over, rate hikes going ahead, will be lower than 75 basis points (bps), which may also boost FII inflows into emerging markets including India," he added.
On Wednesday, the US Federal Reserve raised its policy rate by 75bps, which was widely expected by market participants. While the Fed remains focused on bringing inflation down to its 2% target, the central bank will be more data dependent when deciding on interest rates in subsequent meetings.
The outlook on DII participation is positive as flows from systematic investment plans are robust. But their risk-taking ability may not be as high as seen during the pandemic.
Analysts highlight that retail investors saw mouth-watering returns when they entered the market at significantly lower levels at the onset of covid-19 pandemic in 2020.
However, with the risks much different now, a market correction could lead to tapering in retail flows.
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Besides, increased volatility and dismal performance of much-hyped initial public offerings of tech firms such as Zomato Ltd and One97 Colmmunications Ltd (Paytm) have also left a sour taste for retail investors. This could well keep retail investors away from primary markets in the near term.
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