The relentless selling of stocks by foreign institutional investors or FIIs is likely to ‘taper off’ by the end of the current month, according to an analysis of FII fund flows into India by Maximus Securities Research.
“The FII selling is expected to taper off by end of March’22, After which we expect normal market forces to operate based upon the attractiveness of the scrips and Indices valuations,” the firm said in a report issued today.
The broker based its conclusion on primarily one logic — FIIs are likely to withdraw all the ‘excess capital’ they pumped into India due to the ‘quantitative easing’ or stimulus policy unveiled by the US central bank to deal with the impact of COVID-19.
In other words, Maximus Securities believes that the money that FIIs had invested before COVID-19 is likely to remain in India, and that the current withdrawal of foreign funds will primarily comprise only the money that came in after the US Federal Reserve started feverishly printing dollars to overcome the impact of COVID-19.
Foreign institutional investors — comprising mutual funds, pensions funds, hedge funds and others — have been pumping in billions of dollars every year into India even before the US Federal Reserve started pumping in hundreds of billions of dollars every month in the aftermath of the pandemic.
For example, in the 12-13 months before the pandemic (February 2019 to February 2020), these investors put in a total of around $21 bn (Rs 1.6 lakh cr in today’s rupee valuation).
This was thrice what Indian institutional investors — such as Indian mutual funds, insurance companies, banks and others — put in during the same period, a total of Rs 53,000 cr.
The mega infusion of over Rs 2 lakh cr by the two parties led to the Nifty 50 index rising by around 11% during this period, from 10,834 to 12,033 points.
PANDEMIC PERIOD
In contrast, during the pandemic period (Feb 20 to Sep 2021), FIIs alone pumped in around $26 bln or around Rs 2 lakh cr.
This resulted in much bigger gains for the Nifty, which rose from 12,033 to 17,509 points, a gain of 46% over a period of around 19 months.
This jump in the Nifty was largely on account of the US Federal Reserve pumping in trillions of dollars into the world economy to overcome the impact of COVID-19.
What is interesting is that during this period of hyper-investment by foreign mutual funds and other institutions, Indian institutions were busy booking profits.
In fact, the activity of Indian institutional investors during the COVID period could be divided into two — a one-month period of hyper investment when the market crashed due to fears of COVID, followed by a longer period of profit booking when the market started going up with the return of FIIs and Fed money.
Put in terms of raw numbers, Indian institutional investors pumped in Rs 47,438 cr in the one month period from Feb 20, 2020 to March 24, 2020 when the market crashed, and over the next 18 months, they sold stocks worth 67,715 cr as the market zoomed, thus netting a sweet return.
POST COVID PERIOD
While domestic institutions did turn out to have been smarter than foreign institutional investors during the COVID period, the same could not be said for the post-COVID period (last five months).
For example, during the post-COVID period starting from October last year, it was the foreign institutional investors who have been booking profits, while domestic institutions have been busy buying shares that were being dumped by foreign institutions.
What is interesting is that the same domestic institutions who were selling these shares when the Nifty was in the 12,000-15,000 range were busy lapping these up when the Nifty ranged between 18,000 and 16,300 in the post-COVID period (last five months), thus buying back the shares at higher prices.
In fact, it is precisely because of this ‘hunger’ for shares by domestic institutional investors that the market continued to remain elevated during the post-COVID phase (last five months), which only hurt the domestic institutions as they had to buy these shares at a high valuation.
If the domestic institutions had observed restraint while the foreign institutions started selling in October, the Nifty would have come down to the 12,000 range and they could have snapped up these same shares at much lower valuations.
Anyway, during the last five months, FIIs sold a total of $18 bn or around Rs 1.4 lakh cr worth of shares in Indian markets, while domestic institutions purchased a whopping Rs 1.55 lakh cr worth of shares.
In other words, the domestic institutions fully absorbed the impact of FII selling, preventing the market from falling and allowing the FIIs to make handsome profit on their investments.
END GAME
Now comes the end-game, which will determine who won and who lost.
According to Maximus Securities, FIIs net invested $26 bln during the COVID period. Since they’ve have already sold $18 bn of it, that leaves only $8 bn of their net investment from COVID period still circulating in Indian market.
“Around 70% of the pull out is already completed as we are approaching the Fed meeting dated 16 Mar’22 confirming the hike in rates,” it noted.
Hence, it expects only around $8 bn more of the FII money to go out in this current phase of withdrawal, which it expects to happen by the end of March.
After this, it said, the markets will stabilize, and normal trading will take place.
RISK FACTORS
However, there are two assumptions made by the brokerage in its report.
The first is that since the FIIs invested $26 bln, they will only withdraw $26 bn. This assumption does not take into consideration the fact that the $26 bln that the FIIs put into the Indian market may presently be valued at $30-32 bn, since the market level has also gone up.
Hence, instead of $8 bn remaining to be pulled out, there may be around $12-14 bn remaining to be pulled out, and this could therefore stretch well into April.
The second major assumption is that the FIIs will pull out only the money that was invested from Federal Reserves COVID-stimulus, and not from its earlier rounds of stimulus.
The US Federal Reserve had pumped in trillions of dollars into the world economy even before COVID-19 had struck, in the name of helping the US economy recover from the impact of the 2008 financial crisis. Like other emerging markets, India too got a portion of the trillions that the US Fed unleashed onto the market, helping raise Nifty from 5,000 to 12,000.
Now that the US central bank has started on its policy of quantitative tightening or the withdrawal of the money it injected, there is no telling whether it will stop after reeling in the funds it injected as COVID stimulus, or whether it will want to withdraw the stimulus funds related to the 2008 financial crisis. If it does that, then Nifty could go down all the way to 8,000 or 8,500 before the US Federal Reserve is done with its monetary tightening.
For now, though, it is still unclear what the US Federal Reserve plans to do, and at what point it will stop its monetary tightening process. The fate of Indian stock markets too hang on this crucial fact.