FIIs have been selling off Indian stocks heavily, with significant outflows recorded on Budget Day, July 23, and continuing into the following day. According to NSE data, FIIs offloaded stocks worth ₹2,975.31 crore on July 23 and an additional ₹5,130.90 crore on July 24. This wave of sell-offs has been attributed to concerns over the recent budget announcements, particularly the rise in capital gains taxes and the securities transaction tax (STT) in F&O trading.
Despite the current sell-off, brokerage firm Motilal Oswal Private Wealth remains optimistic about the future involvement of FIIs in the Indian equity markets. MOPW highlighted that the Indian market has shown remarkable resilience and performance over the last three years. This growth has been driven by substantial increases in corporate profits and strong inflows from Domestic Institutional Investors (DIIs). Although FIIs have been net sellers during this period, resulting in a decade-low ownership of Indian equities prior to the domestic elections, there are several compelling reasons for them to reconsider their stance.
Economically, India is poised to be the fastest-growing major economy this year, with a positive GDP growth outlook for the coming decade. The country’s external account has strengthened significantly since 2022, supported by a higher share of oil imports from Eurasia at lower costs compared to traditional suppliers in the Middle East. This shift has contributed to the stability of the Indian rupee, adding another layer of attractiveness for foreign investors.
Corporate India’s balance sheets are also in good shape, with a declining debt-to-equity ratio and an improved capacity to service interest costs. Positive trends in credit growth, capacity utilization, and capex further bolster the outlook. These factors, combined with strong corporate performance and broad-based market rallies, make the Indian market an appealing destination for FIIs.
The recent rally in Indian stocks has been notably broad-based, contrasting with the US market, where performance has been dominated by a few top companies, often referred to as the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla). In India, the strong corporate performance and price movements have been observed across various market capitalizations. This broad-based growth could be a significant attractor for FIIs looking for diversified investment opportunities.
It’s important to note that Indian stock markets have become less susceptible to FII flows due to the financialization of savings and increased retail participation. DIIs are expected to cushion any erratic FII behavior, providing a stabilizing influence on the market.
Motilal Oswal suggests a strategic approach for investors considering the current market dynamics. They recommend a staggered investment strategy over 3-6 months for large-cap and multi-cap investments and over 6-12 months for select mid and small-cap investments. This approach is based on the observation that large-cap stocks are fairly valued, while mid and small-cap stocks are relatively expensive.
While the Union Budget 2024 has introduced some uncertainties leading to FII outflows, Motilal Oswal sees potential for positive net FII flows in the future. The brokerage emphasizes India’s strong economic fundamentals, healthy corporate balance sheets, and the broad-based nature of the recent market rally as key factors that could drive a positive reevaluation by FIIs.
Despite the current market volatility, the outlook for Indian equities remains optimistic. Domestic investors are expected to continue supporting the market, cushioning the impact of FII sell-offs. As the market adjusts to the new budget realities and the underlying economic strengths of India become more apparent, FIIs may find renewed confidence in returning to Indian equities. For now, investors are advised to stay focused on the fundamentals and consider the long-term potential of the Indian market.
