FII flow into Indian equities may pick up in later part of 2022: Analysts

FIIs have been on a selling spree across most EMs, including India where they have sold over $11 billion worth of equities since October 2021 when they started to unwind their position here

Foreign institutional investors (FIIs) have been on a selling spree across most emerging markets, including India where they have sold over $7 billion worth of equities thus far in 2022 – and over $11 billion since October 2021 when they started to unwind positions in India. Analysts say FIIs may choose to remain on the sidelines for now, and come back in a big way in the later part of 2022 when the markets face less headwinds.

The nervousness right now, analysts said, is more on account of the likely policy actions of global central banks, especially the US Federal Reserve (US Fed) that is seen hiking rates aggressively in the backdrop of three-decade high consumer price inflation in the US. This, they believe, can see the bond yields spike and make equities less attractive.

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“FIIs have sold equities since October 2021. What’s worrying them is a long tenure of virtually zero interest rates across the developed world that seems to be nearing an end. Any surprise in terms of the balance-sheet contraction by the US Fed, either in terms of quantum or timing, can be a further hindrance. High oil prices are another cause for concern for our economy. Spike in crude may be negative for the interest rates; hence, equity valuations are also being questioned or repriced,” explained Devang Mehta, head of equity advisory at Centrum Wealth.

The S&P BSE Sensex and the Nifty50 have lost around 3 per cent each since October 2021 when the FII started to sell, data show. Realty, fast moving consumer goods (FMCG) and healthcare indices have been the worst performers among sector indices that have slipped 7 per cent to 11 per cent during this period, data show.



Domestic institutional investors (DIIs) and mutual funds, on the other hand, have used this opportunity to buy. While FIIs sold equities to the tune of $10.7 billion (Rs 79,912 crore) since October 2021, MFs and DIIs lapped up stocks worth nearly Rs 68,000 crore and Rs 94,000 crore, respectively, data show. (See table below)

“Domestic investors have started to play an important role in the markets, which has cushioned the market fall despite the FIIs being in withdrawal mode. Besides the interest rate hike concerns, the impending state elections, especially in Uttar Pradesh, is keeping FIIs on edge. That said, we are on a strong footing as regards the earnings cycle. The earnings guidance for the next four quarters remains robust. Investors should use the market correction to buy for the long-term,” suggests Aniruddha Sarkar, chief investment officer, Quest Investment Advisors.

Mehta of Centrum Wealth expects the FII flow to pick up in the later part of 2022 when the markets face less headwinds and have accustomed to the new normal as regards the global central bank policies.

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“India is expected to receive a good share of flows once the volatility subsides. Domestic flows from retail investors, HNI’s family offices still remain strong and have provided a good cushion to the markets when FIIs intensify their selling. A good probability of earnings growth along with a decent valuation rerating can compel FIIs to come back with force,” he said.

FIIs, according to Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, still look at India as a structural growth story despite the near-term headwinds. “The selling pressure should ease a bit in the coming months, as the economic activities gain momentum once the Omicron-related disruptions abate and corporate earnings catch up to justify India’s premium valuation,” he said.

Will the FII flow ebb?