Stock Market | Silver lining in FPI equity exodus

After witnessing the stock indices scale new highs just recently, investors in India’s stock markets are having to fend with a fall of over 8% in just a month, with the main cause attributed to heavy selling by foreign portfolio investors (FPIs).

Of course, the indices go up and down as market expectations vary and FPI selling is nothing new to Indian markets. However, the scale of the sell off is what makes this time a significant event to sit up and take notice.

Data from the National Securities Depository Services Limited (NSDL) shows that net selling in equity by FPI during October at about Rs 94,017 crore and in November so far it is Rs 19,994 crore. To compare, the heaviest selling in the past was during the Covid-19 pandemic when they sold off approximately Rs 61,973 crore in March 2020.

FPIs have come to be a major force in the Indian markets. The Securities and Exchange Board of India (SEBI) classifies ‘FPI’ into two categories, with foreign governments, sovereign wealth funds, institutional investors and certain funds under Category I, and corporate bodies, charitable organisations, family offices, and individuals coming under Category II.

The NSDL and SEBI data show over 11,000 registered FPIs. The NSDL data also shows that by September end, FPIs’ assets under control (AUC) across various types of securities crossed Rs 84.4 lakh-crore or approximately $1 trillion. At the end of October, this stood at Rs 77.5 lakh-crore with about Rs 71 lakh-crore in equity. For comparison, the market capitalisation of all BSE-listed companies was about Rs 446 lakh-crore on October 31, which means FPIs held about 16%.

So, was this a bigger sell off than during the pandemic? In absolute figures, yes. But let us dig deeper.

In October, about Rs 94,017 crore was withdrawn from the equity markets and the total equity FPI holding was almost Rs 78 lakh-crore at September end. During the pandemic, in March 2020, the sell-off in equity was Rs 61,973 crore, and the total FPI equity holdings was almost Rs 29 lakh-crore at the end of February 2020. Hence, in relative terms, as a percentage of the preceding month close equity holding, the FPI sell-off is lesser now at 1.21% compared with over 2% in March 2020. Further, the net selling in debt in October was just over Rs 4,400 crore, but it was Rs 60,376 crore in March 2020 meaning it was a system-wide reaction. This time the effect on indices was an 8% decrease but the pandemic dealt a double-digit fall, beyond 25%. Even after the pandemic, our economy and the markets did continue to grow touching new highs.

This signals that the FPI sell-offs may have been a result of extraneous reasons and may not necessarily point out anything substantively wrong with India’s stock markets per se. The uncertainties surrounding the US election results and the US Federal Reserve rates could be the major reason. With the election results announced and the Fed lowering the rates again, some of the uncertainties could settle.

The growing attractiveness of other emerging markets could also be a reason. The high valuations in India’s markets are also said to be a cause for concern. The average price-earnings (PE) ratio of BSE Sensex companies was 24.10 in 2023-2024 and has averaged 23.96 from April till date, down from 24.96.

The PE ratio has been higher earlier too. In 2020-2021, it was 28.1. Higher valuations reflect optimism but also spell caution and an impending correction. However, they do not seem to be the sole driver of these sell-offs. The sell-offs could also be temporary due to profit-booking. They did buy a huge amount in September — Rs 57,724 crore worth of equity.

But yes, there is still an impact. Every time the FPIs sell, there is volatility in markets, flight of capital, and a dent in investor confidence. However, this time, markets remained relatively resilient with our domestic institutional investors (DIIs) coming to the rescue and becoming huge net buyers.

Further, more efforts to boost the potential of retail investors will not just support market stability but also further the goals of financial inclusion and wealth creation for the public. Foreign exchange inflows can be sustainably grown by focussing on exports and promoting atmanirbharta, which will attract foreign direct investment (FDI) too, which is more stable and long-term.

Managing the vicissitudes of FPI investments is a necessary risk of global integration. Having decided to take the risk, strengthening the nation from inside out will be a more powerful stance to take than relaxing any policy or procedure to attract foreign investors. The world knows what India has to offer, it’s time we know it too.

(Usha Ganapathy Subramanian is a practising company secretary, and Ranjith Krishnan is a sustainability consultant.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.