Despite the cut-offs and limitations imposed by the Reserve Bank of India, a sizable portion of foreign institutional investors, or FIIs, invest in Indian enterprises. FII has been permitted to invest up to 10% of the equity of any one company, subject to the overall limit of 24% on investments by all FIIs, NRIs, and OCBs. For an Indian firm, any FII investment is fantastic news; but, the sale of such an investment is not so fantastic. Analysts claim that with FIIs, 2023 has not gotten off to a great start. However, there are several factors that are causing FIIs to sell their holdings rather than invest in new ones.
Why FIIs Are Selling, According to the Media?
Reports generated at the start of 2023 appeared to be pessimistic in terms of FII investment. According to reports, FIIs sold investments totaling almost Rs. 5,000 crores in a span of a few trading sessions. This trend has continued since December 2022.The reason? Analysts claim that FIIs pursue assets that are frequently undervalued in other markets even though they are still interested in India's thriving economy.
What influences how FIIs act?
Apprehension about international markets, in general, maybe one of the causes of FIIs' selling in the Indian market. In November 2022, there was a significant wave of FII buying to start. There was a selling boom that came after this. This behaviour may have been prompted by recent news of a recurrence of Covid-19 cases in China. When FIIs invested more than Rs. 22,000 crores in the market the month before, they sold shares worth a staggering Rs. 14,231 crores in December 2022. What impact does the FIIs' offloading of shares have?
Selling of Investment by FII
When FIIs sell their market holdings, the market's available liquidity is reduced. The benchmark indices NIFTY 50 and SENSEX 30 experienced drops of up to 2% at the beginning of 2023 as a result of these FIIs' actions. As February arrived, more than 3,000 crore rupees worth of shares were withdrawn from FII investments, continuing the trend of withdrawal from the Indian stock market. Other Asian markets, such as China, South Korea, and Hong Kong, are doing reasonably well while India is feeling the effects of this. This indicates that FIIs believe the Indian market is overvalued and would prefer to avoid it and invest in other markets that are more undervalued.
But why? What are the reasons for this relentless selling?
Well, we can think of four main reasons. Let's examine them one at a time…
1. Rising Interest Rates
To combat inflation, central banks around the world have been raising interest rates declining Indian rupee
2. Depreciating Rupee
The rupee has declined less than other emerging markets have. But that doesn't change the fact that the rupee has declined significantly.
3. Fears of a recession cause people to flee to safety
Nearly everyone believes that this year, the US will experience a recession alongside the rest of the developed world.
4. The Reopening of China
Since the creation of COVID, China has been shunned by the financial world. We have witnessed severe lockdowns, inquiries into prominent Chinese businessmen, restrictions on a number of industries, and the disastrous zero-covid policy.
Do FIIs think China is more appealing now?
The primary cause of this ongoing selling is the fact that other markets, such as China, Hong Kong, South Korea, and Taiwan, are less expensive than India. Selling in India and purchasing in less expensive markets have occurred, according to VK Vijayakumar, the chief investment strategist at Geojit Financial Services. However, he continued, valuations in India are starting to look good.
The Effect of FII Sellout on Sentiment
Once you know why FIIs are selling, it will be easier to comprehend why other related circumstances have arisen. If you invest in stocks, you are aware that market sentiments have a significant impact on stock prices and markets in general. The economy is affected in a ground-breaking way by this. The Indian rupee's value declines in relation to the US dollar as market sentiment plummets as FIIs withdraw. The negative impact on the Indian rupee is a further and more important consequence of FII outflows and the Reserve Bank of India's rate increase.
For years, FIIs have been known to be the drivers of certain stocks growing in value. Over benchmark indices, their dominance may have lessened and this may be a cause for Indian investors to invest with a vengeance. Right now, China has opened its doors to investment after a long hiatus. However, analysts feel that Indian investment will always be on the minds of FIIs in the long run.