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Foreign portfolio investors (FPIs) seemed to have some indication about the outcome of Lok Sabha elections as their selling in stocks intensified since January this year.
With China beckoning them again as an alternative investment destination, foreign players pulled out around Rs 125,000 crore from the cash market (excluding IPO investments) since January this year. However, domestic institutional investors, led by mutual funds and insurance companies, bought stocks worth Rs 300,000 crore during the five-month period, aiding benchmark indices to hit new peaks.
According to stock exchange data, FPIs sold stocks worth Rs 75,000 crore during the March-May period while DIIs propped up the market by investing Rs 150,000 crore in the stock market. The FPI action was contrary to the popular perception that NDA will better its 2019 tally, winning over 350 seats.
On Tuesday, FPIs sold a record Rs 12,436.22 crore worth of Indian equities on a net basis.
In fact, FPIs were sellers in the stock market in the last five years by pulling out Rs 3.94 lakh crore from stocks. However, domestic funds came to the rescue of the market by investing Rs 7.83 lakh crore during the five years, taking the market to new heights.
Market experts said that several classes of investors, including FPIs, had taken short positions in the market and after the exit polls predicted a win for the ruling BJP, the market witnessed short covering of those positions by investors and the Sensex surged 3.39 per cent on June 3.
While FPIs holding long position in the markets had taken some short position to hedge their risk in case of an adverse poll outcome, there were other group of investors who took short position in line with their expectation that the BJP may not come to power on their own and may need to cobble up an alliance to form the government, they said.
IIFL Securities Lead- Research Jayesh Bhanushali said foreign portfolio managers have been negative on India due to the emerging attractiveness of Chinese stocks and likely election uncertainties. However, the weekend exit polls result made short-sellers cover their positions.
“A trend which was witnessed in 5 months preceding the election results since 2009 was that the FII were net positive in the cash segment. However, in 2024, FIIs have sold around Rs 1.26 lakh crore worth of stock in the cash segment since January. We believe that the FIIs are likely to stage a comeback in the second half of calendar year 2024 in India due to steady economic growth, stable government, and a favourable macro-economic environment with the expected rate cuts by the central banks,” he said.
The main trigger for the FPI selling has been the outperformance of the Chinese stocks. The Hang Seng index boomed 8 per cent in the first half of May triggering selling in India and buying in Chinese stocks, according to V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services
Another reason was the spike in US bond yields. Whenever the US 10-year bond yields rose above 4.5 per cent, FPIs sold in emerging markets like India and moved money to bonds.
These two factors also prompted the selling of equity in India. FPI activity in June will be crucially influenced by the election results. If the election results ensure political stability, the market is likely to respond positively to that. However, in the medium term, US interest rates will exert more influence on FPI flows.
