Foreign investors have been selling Indian stocks in recent times, with net outflows exceeding Rs. 30,000 crore ($4.1 billion) in the last few weeks. This has caused concern among policymakers and investors, who fear that the trend could continue in the coming months.
Historically, whenever Indian stocks crashed or rose sharply, FIIs were usually behind it. Why? What are the reasons for this relentless selling? But that is not the case anymore. The Indian retail investor has made his presence felt. Via direct investments of mutual funds, retail investors have reduced the influence of FIIs in the market. But that doesn’t mean they don’t have any influence. They certainly do. And when they buy or sell in large quantities, the market cannot move in the opposite direction until they are done.
Here are four reasons why foreign investors are selling Indian stocks:
- Rising Interest Rates: The Reserve Bank of India has been raising interest rates in order to combat inflation. Higher interest rates can make borrowing more expensive for businesses, which can slow down economic growth. Foreign investors may be selling Indian stocks because they anticipate a slowdown in the Indian economy due to higher interest rates.
- Depreciating Rupee: The Indian rupee has been depreciating against the U.S. dollar, which can make investing in Indian stocks less attractive to foreign investors. A weaker rupee means that the returns on Indian investments may be lower for foreign investors when they convert their profits back into their home currency. From 73 to a dollar in September 2021, the rupee fell to 83 in October 2022. That’s a decline of 12% in 13 months. This is a big loss to any foreigner holding Indian assets. If the asset did not rise in value by at least 12% during this time, he would face a loss.
- Flight to Safety Due to Fears of a Recession: There has been growing concern about a global economic slowdown, with fears of a recession in some major economies. In times of uncertainty, investors may move their money to safer assets, such as U.S. Treasuries or gold. This flight to safety can lead to a sell-off of riskier assets, including Indian stocks.
- The Reopening of China: As the Chinese economy reopens after the COVID-19 pandemic, there is growing competition for investment from foreign investors. China has been attracting a significant amount of foreign investment, which may be diverting funds away from other emerging markets like India.
Conclusion:
FIIs are well-known drivers of specific stocks as well as the entire market. Their dominance over the benchmark indices may have reduced over the last few years due to the rise of the Indian retail investor. But they still hold sway over the stocks in which they have a big shareholding. If they sell continuously, for many quarters, these stocks are likely to languish. Investors should keep this in mind when considering stocks with high FII holding.
Foreign investors are selling Indian stocks for a variety of reasons, including rising interest rates, a depreciating rupee, flight to safety due to fears of a recession, and competition from the reopening of the Chinese economy. These factors are likely to impact the Indian stock market in the coming months, and policymakers and investors will need to keep a close eye on the situation to ensure that the market remains stable and sustainable.
