Selling pressure: Several factors are driving FPIs out of Indian markets

The ongoing US elections have been a contributory factor to FPI selling through October and November. Apart from that, some FPIs are fence-sitting for outcome of the Federal Reserve meeting this week

Uncertainty has contributed to volatility in India’s financial markets so far in  2024-25. The attitude of foreign portfolio investors (FPIs) in particular has affected the market. Since April this year, FPIs have, in aggregate, been net sellers of Indian equity worth Rs 8,644 crore (until November 4). But selling has been concentrated in three specific months — huge net sales of Rs 94,017 crore in October, a substantial Rs 25,586 crore in May, and Rs 8,671 crore in April. Selling in April-May coincided with India’s general elections and was driven by apprehensions about the outcomes. The ongoing US elections have been a contributory factor to FPI selling through October and November. Apart from that, some FPIs are fence-sitting for the outcome of the Federal Reserve meeting this week. The yield on US government bonds increased in recent weeks and the position of the Federal Reserve will be crucial for the market. FPIs are also rebalancing their weightings given to emerging markets and allocating more resources to China after it announced its latest stimulus package.

 

Moreover, many investors — not just FPIs — are getting more cautious about India exposure, given the possibility of energy prices trending up, owing to geopolitical tensions. Many investors are also disappointed with weak second-quarter earnings. Meanwhile, the US elections may be consequential. Opinion polls indicate the presidential election is likely to be close and the Congressional races are also critical when it comes to control of Congress. If Kamala Harris wins, the US will likely continue with the policies and stances initiated by the Joe Biden administration. The Biden administration has done reasonably well in terms of pulling the US out of the Covid slump and tackling inflation. The Donald Trump campaign, however, promises to alter the American policy direction radically in both the domestic and geopolitical spheres. Mr Trump has said he intends to impose large Customs duties on US imports and cut back sharply on immigration and work visas, which would impose new costs on India’s information-technology services industry.

 

Mr Trump also intends to reduce Federal support for multiple domestic US programmes and cut US commitment to the North Atlantic Treaty Organization and other defence allies, and to pull the US out of Climate Control agreements. The Republican also intends to rework the income-tax structure. In fact, a group of 23 Nobel laureates has written how some of the policies proposed by Mr Trump will affect the US economy. Given the role of the US in the global economy and political order, abrupt changes can have disproportionate implications. The impact of such changes would be bearish for the global economy and have a particularly negative effect on those sectors of the Indian economy with close ties to the US. It may also affect the US markets. Any attempt to undermine the independence of the US Federal Reserve will also have a significant impact on financial market sentiment

 

However, it must be noted that domestic Indian institutions continue to be bullish and, as of now, retail inflows to the stock markets via mutual funds are strong and direct equity investment is also high. However, trends affect sentiment, and the correction so far has knocked 9 per cent off the Nifty in the last five weeks. More selling could lead to a change in sentiment and it behoves investors to be cautious in such a scenario.