FIIs have typically adopted a macro approach to India rather than a micro approach. Consider the following instances.
- In 2008, when the Lehman crisis struck the global capital markets, FIIs were sellers across the emerging markets which they considered most vulnerable. Indian markets corrected sharply by about 60%.
- Again in 2013, post the taper crisis in the US, the FII sold out heavily in India. That was the first time the rupee fell to as low as 69/$ as the high current account deficit also led to aggressive selling by FIIs in debt.
- The situation reversed in 2014 after there were the first signals of Narendra Modi forming a reformist government at the centre. That led to a deluge of FII inflows that continued all the way into 2015 before the markets peaked out.
- The next major sell off was seen in the months of September and October 2018 when the financial market crisis in India was combined with a sharply falling rupee and rich valuations. FPI withdrew the maximum money historically in the year 2018
- Post March 2019, there was a sharp inflow of FII money into India after pre-poll surveys started pointing to repeat of the NDA government. FIIs had been concerned about stability if a coalition government were to come into power.
Why do foreign investors sell out of India occasionally?
At the end of the day, the FII looks for the best risk adjusted returns. They have a choice between a variety of developed and emerging markets and can move funds freely. Broadly, there are some basic reasons why FIIs move money out.
- FII sell when there are broad valuation concerns and if the valuation premium of the market over the regional benchmark is too high.
- FII would look to sell when the currency weakens because that reduces their effective dollar returns when they convert back into dollars. Stable currency is preferred.
- There are also other reasons why foreign investors sell. If liquidity condition in global markets is tightening and India is part of a wider emerging market sell-off, then also you can see risk-off selling in India.
- A typical case is when the US increases its Fed rates. That reduces the yield gap between India and the US and is an incentive for selling out of India and settling into safer havens.
- Sustained increase in crude prices pushes India’s current account deficit (CAD) wider. This is specifically a problem that spooks foreign investors as India relies on imported crude for nearly 85% of its daily needs.
- Foreign investors are extremely sensitive to events in Indian markets. So they prefer to stay light ahead of major events like elections, budget announcements, credit policy announcements, major policy decisions, key state elections etc.
How should retail investors react when the FIIs sell out?
Should retail investors panic and sell out when the global investors sell out. If there are macro concerns on valuations then you can look to sell out but only if you feel that the growth is seriously compromised. That is when markets can really correct sharply. Secondly, FIIs have to look at stock prices and also the currency. As a retail investor, you only worry about the stock prices and not so much about the currency. Hence currency volatility may not be too relevant to you. Thirdly, ask yourself if the Indian economy is in a better shape or not? The fact is the Indian economy in 2019 is in much better equipped to deal with selling by foreign portfolio investors. This is partially because of the strong reserve position of the RBI and also the strong investment muscle of domestic mutual funds which are now having nearly Rs.25 trillion of AUM with 1/3rd in assets under equity.
An important point to remember here! As Nirmala Sitharaman pointed out, we have a $2.75 trillion economy and likely to grow to $5 trillion in 7 years. That is a lot of wealth waiting to be created. For investors, this makes India a default destination. Retail investors must focus more on their long term goals. In the long run, Indian equities will still outperform; irrespective of the cycles of FII buying and selling.
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