Stock market slowdown tests new investors amid FPI selling pressure

Part of the pressure on the currency is due to continuous selling by FPIs. In the last four months (including January) FPIs have sold over Rs 1.75 trillion of rupee-denominated equities

After several years of stellar performance, India’s stock markets produced moderate returns in calendar 2024. The benchmark Nifty 50 gained 8.8 per cent in that 12-month period. But in dollar terms, this amounted to 6 per cent and India ranked 24th in the world in market returns. The last three months have seen negative returns for the market and it is true also for January this year. The rupee has dropped from 82.77 against the dollar in January 2024 to below 86.60 despite large-scale interventions by the Reserve Bank of India (RBI). Part of the pressure on the currency is due to continuous selling by foreign portfolio investors (FPIs). In the last four months (including January) FPIs have sold over Rs 1.75 trillion of rupee-denominated equities. Domestic buying (institutional and retail together) has absorbed the shares but share prices have fallen.

 

Macroeconomic growth targets have been downgraded. Inflation rates have been stubborn. A weaker rupee may be good for exports but it pushes up the cost of imports, including energy imports, which are critically important. Fears of supply disruption due to war have also contributed to pushing up the price of fuels. The first half of 2024-25 was disappointing for most corporations, with slower than expected revenue and profit growth. The third quarter too was slow. A contributory factor was the election model code of conduct in the first half. Tenders in the road sector, for example, are running behind schedule, leading to slower offtake of key commodities like steel and cement. One of the most reliable indicators of economic activity — power generation — has also been flat. Corporate performances continue to look disappointing. Consumer-facing businesses, including fast-moving consumer goods (FMCGs) and auto manufacturers, have pointed at sluggish consumption demand through the festival season. Guidance for the full year and FY26 is cautious.

 

FMCGs, for instance, recorded an aggregate 2 per cent unit volume growth, going by reported results, and automobile manufacturers have complained about inventory pileups at dealerships. Exporters, including services exporters like information-technology companies, have also suffered slowdowns due to the slowing global economy and American caution due to change in administration. Despite the apparent slowdown and the correction of the last four months, valuations of the Indian stock markets are still significantly higher than those of its peers (large emerging markets). This is one of the factors influencing FPI selling. Domestic institutions including mutual funds continue to be flush with funds, given steady inflows from retail investors. But as these institutions have absorbed the selling, it implies that they have been buying at higher than desirable valuations.

 

The Budget may be an inflection point, which could either reverse the bearish trend or accentuate it. If the Budget promises to restore growth and improve consumption, it may trigger a rebound. On the other hand, if it does not enthuse the markets, selling could intensify. In behavioural terms, the next few months may test the resilience of a new generation of investors. A large proportion of retail investors entered the markets during the pandemic and this is the first period of extended losses since the lockdown. Many retail investors have invested directly, and others have entered via the fund route inspired by the Mutual Fund Sahi Hai campaign, which was quite successful in mobilising household savings. If the losses are extended, which is always a possibility, it will test the nerve of new investors, particularly those investing directly and may not have a diversified portfolio. Equity losses — real or notional — can have implications for consumption.