Financials and IT sectors see the bulk of FPI selling

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Fears of aggressive quantitative tightening by the US Federal Reserve to manage inflation have caused the selling of Indian stocks by foreign portfolio investors. This fear has helped increase the selling of Indian stocks by foreign portfolio investors (FPIs). According to research conducted by ICICI Securities Ltd., the recent wave of foreign portfolio investors (FPI) selling activity in Indian equities is on track to become the most significant one since the outbreak of the global financial crisis in 2008.

The domestic brokerage house said in a report dated June 30 that the trailing twelve-month (TTM) cumulative selling by foreign portfolio investors in the secondary market stood at $53 billion, which is a significant increase from the $28 billion that was sold during the financial crisis in 2008. The data on provisional flows from exchanges were used to compile this information.

According to the report, the majority of FPI selling on a rolling basis of 12 months has been concentrated around the financial and information technology sectors (with a contribution of 93 per cent), along with fast-moving consumer goods, other services, and building materials. On the other hand, funds moved into stock markets in the metals, power, discretionary consumer, and telecom sectors.

In spite of significant selling by foreign portfolio investors (FPI), important Indian equities benchmarks have not experienced a significant decline as a result of buying by local institutional investors. According to the research, “As a consequence, the impact on benchmark indexes (NIFTY50, Nifty Midcap) is significantly lesser (15-25 per cent drawdown) compared to GFC (global financial crisis).”

The increase in SIP flows is structural, according to ICICI Securities (monthly run-rate exceeding Rs110 billion), which is also reflected in a tripling of mutual fund accounts from 40 million in December 2014 to 129 million in March 2022. The systematic investment plan is abbreviated as SIP for short.

In the meantime, as a direct result of the persistent selling by FPIs, valuations of Indian equities have come down from their recent highs. According to a report by ICICI Securities, valuations of Indian stocks have become significantly more rational since October 21, and the fear of a structural increase in inflation has been easing as global commodity prices have declined. These developments should build the confidence necessary to slow down FPI outflows incrementally. However, the report said that the risk is still present in terms of rising retail inflation and the price of crude oil, which has not yet materially decreased from its current levels.

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