The sustained selling of Indian stocks by foreign institutional investors (FIIs) continued in January. At the time of writing this, the FIIs had net sold stocks worth ₹60,859 crore or $7 billion during the month. This raises several interesting points.
First, the selling by FIIs has been sustained. From October to now, they have sold Indian stocks worth around ₹1.52 lakh crore or close to $18 billion. But this doesn’t give us the complete picture. Since January 2022, the FIIs have net sold stocks worth only $1.64 billion, which means that on the whole, they haven’t bought anything since then. So, their recent selling could be seen as them booking some profits on investments carried out before 2022, particularly in 2020 when stocks were very attractively priced.
Second, it’s not as simple as FIIs just booking profits. The total equity assets under custody of the FIIs peaked at a little over $930 billion in September 2024. This was also when the broader stock market peaked. By November end, this figure had fallen to around $851 billion, a fall of around 8.6% from the peak. With the FIIs continuing to sell in January and the stock market continuing to fall, the latest figure for the equity assets under custody of the FIIs would be lower than the November figure. This implies that the overall value of the investment of FIIs in Indian stocks must have fallen by more than 10% from its September peak by now.
Third, this also means that the FIIs have been reducing their allocation to Indian stocks because 10% is a significant figure. Of course, their sustained selling only makes the value of their investment fall further, which probably forces more FIIs to consider selling. This is a self-fulfilling prophecy.
Fourth, a major reason for this reduced allocation to Indian stocks is that FIIs want to invest more in the United States (US). In very simple terms, they are taking money out of India and investing in the US. This is because they feel that whatever the new American President Donald Trump has promised under his overarching plan of Making America Great Again (MAGA) is likely to benefit American businesses and hence, stocks listed in the US, and they want to cash in on this possibility.
Fifth, the depreciation of the rupee against the US dollar hasn’t helped the cause of Indian stocks. Through much of 2024, the dollar was worth ₹83-84. The Reserve Bank of India (RBI) ensured that the exchange rate moved within this narrow range. But that seems to have changed. At the end of October, one dollar was worth a little over ₹84. Since then, the rupee has depreciated against the dollar and at the time of writing this one dollar was worth around ₹86.4. Media reports suggest that the new RBI governor is more comfortable with the idea of the rupee depreciating against the dollar than his predecessor.
Now, this is not the place to explain this change in RBI’s stance. Nonetheless, this change impacts how the FIIs look at Indian stocks. At a very simple level, when FIIs sell stocks they get repaid in rupees. But when they have to repatriate this money abroad, they usually need US dollars. Given this, FIIs sell rupees and buy dollars. This leads to a surplus of rupees in the foreign exchange market and a shortage of dollars, leading to the rupee depreciating against the dollar. Now, the RBI can defend the value of the rupee by selling dollars and buying rupees, which it seems to have been doing in the recent past. But now with the changed stance, it might just let the rupee depreciate or probably not intervene at the same pace as in the past, given that the RBI’s supply of dollars is not unlimited.
A depreciating rupee hurts FIIs because they receive fewer dollars on conversion. Let’s say an FII sells stocks worth ₹84 crore. If a dollar is worth ₹84, on conversion, the FII gets $10 million(ignoring other costs for ease of calculation). If it is worth ₹86.4, as it is at the time of writing this, the FII gets around $9.72 million, which is around 2.8% lower.
In this scenario, if the possibility of the rupee continuing to depreciate against the dollar is strong, some FIIs might want to sell their holdings of Indian stocks to avoid this foreign exchange loss. Of course, if many FIIs decide to sell, the rupee will depreciate further against the dollar, unless the RBI intervenes in a major way. In that sense, this dynamic can become self-fulfilling and is currently at work.
Sixth, the valuation of many Indian stocks has been extremely high, so that might also be pushing FIIs to sell-off. Further, the sales growth of listed corporates seems to have slowed down, showing a consumer demand problem. For July to September 2024, the net sales of nearly 3,400 listed non-financial firms grew by 3.9% compared to the same period in 2023. This means that the corporate sales growth was lower than the prevailing rate of retail inflation, which is never a good sign. For October to December 2024, the sales growth for 172 non-financial firms that have declared results has been 1.2%. Of course, this is a very small sample.
To sum up, the ongoing selling by FIIs reflects concerns over high stock valuations, a weakening rupee, and slowing corporate growth in India. With FIIs shifting focus to the US, the Indian market faces potential challenges.
Disclaimer: Views expressed in the article are the author’s own and not those of Upstox. Stocks and securities mentioned in the article are merely for illustrative purposes and must not be construed as recommendations.
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