fii: This one factor holds a clue to when the worst FII selloff might end

NEW DELHI: $39 billion and still… That’s how many foreign institutional investors (FIIs) have sold in the last nine months, making it the most brutal and longest sale by them, even worse than the Global Financial Crisis (GFC) from 2008.

This record outflow, which started in October – also the time when benchmarks last hit all-time highs, has led to sharp declines on Dalal Street. We can only thank the resilience of domestic investors who have cushioned the fall, without which the austerity measures could have been deeper.

What is grim for Indian investors is that analysts are not seeing a reversal in FII outflows anytime soon.

BNP Paribas’ top equity strategist Manishi Raychaudhuri says FII sales in India are overblown, but we need to brace ourselves for the short term.

“There are fundamental reasons for the sell-off of FII. India was relatively expensive in the beginning and that has added a sort of fuel to the fire to the deterioration of India’s current account due to rising fuel prices and consequent weakness in the economy. currency,” Raychaudhuri told ET NOW.

If an investor whose assets are denominated in US dollars or euros, and you expect the destination currency, in this case the Indian rupee, to depreciate perhaps another 3 to 5 percent, you would naturally be hesitant to put money in that market, he explained. from.

Currently, the Indian rupee is trading at record levels of 78.40 against the US dollar. Higher interest rates in the US and a consequent stronger dollar reduce the attractiveness of assets in riskier emerging markets such as India. A weaker rupee further erodes FPI returns on Indian assets.

For now, the US Fed is likely to continue with steep rate hikes, as suggested by its chief Jerome Powell. He suggested during the Fed’s announcement of the rate hike earlier this month that the US central bank could raise its benchmark rate by an additional 0.75 percentage point in July to combat inflation. The Fed raised its benchmark rate by 75 basis points in June — the largest increase since 1994.

Analysts believe a pause in the Fed’s rate hike cycle is key to redirecting FII outflows.

“Rising inflation and the resulting rate hikes by the US Fed are the main reason behind the churn of FIIs from emerging markets to developed markets,” said Hemang Jani, Head Equity Strategy, Broking and Distribution,

in an interaction with ET NOW.

FII sales could continue for a while until aggressive rate hikes by the US Fed stall, Jani added.

VK Vijaykumar, Chief Investment Strategist at

repeated similar views. He told ETMarkets that as long as dollar and US bond yields rise, FIIs will continue to sell. “They won’t stop selling until dollar and bond yields stabilize, which in turn will depend on US inflation and Fed policy.”

FII returns matter as signs of a sell-off slowing or reversal may indicate that the market bottom has likely been reached and that D-Street is poised for another leg of the rally.

While it’s difficult to predict the exact point at which the tide will turn for FII flows, TrustLine Holdings’ ArunaGiri N suggests that FII money will come back much earlier than the Fed’s timeline for settlement.

“Not only will it be sooner, but it will be much bigger than what went out. This is one reason why some seasoned investors expect a melt-up (bull-run) for the Indian markets next year (2023),” he wrote. . in a note from last month.

(Disclaimer: Recommendations, suggestions, views and opinions of the experts are their own. They do not represent the views of Economic Times)

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