Rupee Slides, FPIs Continue To Pull Out
Indian markets have seen a sharp selling streak by Foreign Portfolio Investors (FPIs) with another outflow of ₹3,731.60 crore from Indian stocks trading session marking the 11th consecutive day of selling, outlining a sustained trend of bearish sentiment among international investors towards the Indian equity market.
According to data from Trendlyne, The steady pullout over the past 11 days amounts to ₹73,123 crore and ₹62,124 crore in October so far, with the most substantial sell-off occurring on October 03, when FPIs offloaded ₹15,506 crore. FPIs last engaged in net buying on September 26, acquiring stocks worth ₹630 crore.
However, despite the heavy selling activity by FPIs, the Indian stock markets have emerged resilent with minimal impact due to the strong support seen from domestic institutional investors, the robust buying has resulted in cushioning against the impact of the outflows from forien investors.
The Indian rupee on the other hand has bore the impact which has fallen to its lowest level of ₹84.20 against the US dollar.
Nifty’s Downward Slide
In the first eight months of the current calendar year where markets continued their upward trajectory, every dip was seen as a buying opportunity, in October, however, Indian stocks have reversed sharply propelling the front-line indices to trade at multi-month lows.
In recent times, Indian stocks have been fairly quiet as they struggle to find direction after a sharp fall in early October. Even though the market was mostly dominated by buyers (bulls) throughout 2024, they have lost momentum this month, leaving stocks with little support.
In October, the Nifty 50 index has dropped by 2.91%, falling below the important 25,000 mark. From its recent high of 26,277, it has seen a 4.4% decline. Similarly, the Sensex has fallen by 4.65% from its recent peak of 85,978 and is down 3% so far this month.
Mid-sized and smaller stocks haven’t escaped the decline either, though their losses have been less severe. The Nifty Midcap 100 index is down 1.22% in October, and the Nifty Smallcap 100 index has fallen by 0.89%.
So what is leading to the record pull outs by Foreign Portfolio Investors (FPIs)?
—High Stock Prices: Indian stocks are considered expensive compared to other emerging markets, making them less attractive to investors.
Weak Company Results: Expected poor performance from Indian companies in the September quarter has added to investor worries, leading to the market’s decline in October.
—Global Economic Concerns: Fears of a possible recession in the US, rising interest rates, and a slowing global economy are causing investors to avoid riskier markets.
Geopolitical Tensions: Conflicts like the Iran-Israel situation are creating uncertainty in the markets.
—Unwinding of Yen Carry Trade: Some FPIs had used low-interest Japanese Yen to invest in Indian stocks. With possible interest rate changes in Japan, they are now pulling out.
—Better Performance in China: Chinese stocks are currently doing better than Indian stocks, attracting FPIs to invest more in China.
Where are FPIs investing instead?
—China: With Chinese stocks performing well, many FPIs are shifting their focus there.
—Other Emerging Markets: FPIs are also looking at other markets with cheaper stocks than India.
—Debt Markets: While withdrawing from stocks, some FPIs are still investing in Indian bonds for more stable returns.
RBI To Access Threat On Bond Market
However, in recent developments, the Reserve Bank of India has taken notice of the slowdown in foreign investment in fully accessible government bonds (FAR). This is happening while the rupee faces pressure due to global market volatility. To understand how this is affecting local debt markets, RBI officials have informally asked banks, especially foreign ones, about the unwinding of overseas positions in Indian debt, including those involving certain interest rate derivatives.
Bank TRS Positions
The RBI is particularly interested in the unwinding of Total Return Swap (TRS) positions, which some foreign banks use as a way to invest in local bonds without directly holding them. A part of the foreign inflows that came into the market ahead of India’s inclusion in the JP Morgan bond index was through TRS. The FAR category of bonds, introduced by the RBI in 2020, allows unrestricted foreign investment, and only these bonds qualify for the JP Morgan index.
Of the $10 billion foreign investment in Indian debt between September 2023 and June 2024, around 20-25% is estimated to have been through TRS instruments. India’s inclusion in JP Morgan’s Emerging Markets (EM) bond index was announced in September 2023.
Decline in Bond Appeal
After strong foreign investments in FAR bonds for three months, the flow has suddenly slowed down this month. Last week even saw the first outflow since India’s domestic bonds were added to the JP Morgan index in June. Meanwhile, foreign portfolio investors (FPIs) have sold about $8 billion worth of Indian stocks this month.
Data from the Clearing Corporation of India shows that in the week ending October 11, FPI holdings in FAR bonds dropped by ₹1,675.25 crore, bringing the total down to ₹2.48 lakh crore. From September 30 to October 15, the increase in FPI holdings of FAR bonds was only ₹47.5 crore, much smaller than the previous months. For FPI investments to match the $2-2.5 billion per month seen in the last three months, the pace of investment would need to pick up significantly in the remaining trading days of October.
Last Friday, the rupee fell past the important 84-per-dollar mark due to global investors rushing towards the safety of the US dollar. Stronger-than-expected US economic data has also lowered expectations of interest rate cuts by the Federal Reserve, pushing US 10-year treasury yields up by 22 basis points this month. Higher US bond yields make emerging market bonds like India’s less attractive to investors.
While foreign investment in FAR bonds has slowed, there’s a chance for some recovery by the end of the month since India’s share in the JP Morgan index is set to rise by 1% every month until March 2025.
Outlook
Earnings to stay flat in 2Q, at lowest in eight quarters
Motilal Oswal expects company earnings in its coverage group to remain flat in the second quarter of FY25, marking the lowest performance in eight quarters. For Nifty 50 companies, earnings are projected to grow by just 2% compared to the same period last year, the lowest in 17 quarters. Excluding oil marketing companies (OMCs), earnings for the coverage group and Nifty are expected to grow by 7% and 5% year-on-year, respectively, both the lowest in eight and 17 quarters. Profit margins are expected to shrink due to the strong performance last year.
The EBITDA margin (excluding financial companies) is predicted to drop by 1.5 percentage points for the companies under Motilal Oswal’s coverage, reaching 16.4%, mainly due to weaker performance by OMCs. For the Nifty 50, the margin is expected to shrink by 0.4 percentage points, reaching 20%. Earnings growth will largely come from banking and financial services (BFSI, +11%), healthcare (+15%), utilities (+24%), and telecom, where losses are expected to decrease, with a loss of ₹4 billion in September 2024 compared to ₹3 billion in September 2023.
Market focus shifting; emphasis on sector rotation
Axis Securities notes that with the recent rise in stock prices, much of the expected positive news is already factored in. They expect the market to consolidate in the short term, with fewer stocks driving gains. The focus will likely be on rotating investments between different sectors and styles in the coming months.
Midcaps and smallcaps have performed well recently, but Axis Securities believes they now carry higher risks due to their current valuations compared to large-cap stocks. As a result, they expect a slowdown in some parts of the broader market, with more investment likely to flow into large caps. Despite this, they believe the Nifty 50 could hit new highs soon. Over the long term, they remain optimistic about the broader market, with ‘growth at a reasonable price’ and ‘quality’ being attractive themes.
With China’s recovery, some cyclical sectors in India could see a rebound. However, large private banks, telecom, consumption, IT, and pharma sectors offer more stability in the near term. Axis Securities maintains its target for the Nifty 50 at 24,600 by March 2025, valuing it at 20 times March 2026 earnings. They advise investors to remain invested, keeping around 10% cash on hand to take advantage of any market dips and invest in high-quality companies with strong earnings potential over the next 12 to 18 months.
