Persistent FII selling to keep markets on edge

The rally proved short-lived. A day after India’s stock markets shot up more than 1% following Donald Trump’s victory in the US elections, adding ₹7.75 trillion to investor wealth, the benchmark indices were back to their downward slide, with the rupee, too, plunging to a new low.

Sustained selling from foreign institutional investors (FIIs) in cash and derivatives markets made the market choppier. Both benchmark indices fell more than 1%, erasing much of the wealth gained a day earlier. The NSE Nifty tumbled 1.16% to 24,199.35 and the BSE Sensex fell 1.04% to 79,541.79.

To be sure, FIIs had also sold shares on Wednesday—the day of the US election results—worth ₹3,713.67 crore, according to NSDL data, but that was offset by purchases of ₹4,889.33 crore by domestic institutional investors (DIIs).

On Thursday, FIIs sold shares worth a provisional ₹4,888.77 crore, per BSE data. The indices took a beating as DII purchases totalled just a provisional ₹1,786.7 crore.

In addition to cash sales, FIIs are shorting derivatives with index futures sales totalling a net ₹1,146.43 crore on Thursday, reflecting their bearish sentiment.

The situation could continue until the dollar weakens, said analysts Mint spoke with, who are closely eyeing the US Federal Reserve policy commentary and policy action later on Thursday.

The Fed is expected to cut its policy rate by 25 basis points from the current 4.75-5% range. A basis point is one-hundredth of a percentage point.

Rupee slide continues

Meanwhile, the rupee closed at a fresh low of 84.38 to the greenback due to the FII selling. Since October, when FIIs began selling, the rupee has fallen 0.7% through the fresh low on Thursday.

It could have been worse, but for the Reserve Bank of India (RBI) selling dollars.

“Had RBI not intervened, the rupee would have depreciated below 85,” said Ritesh Bhansali, director (risk management consulting), Mecklai Financial. “The pressure on the local unit could sustain if the FIIs continue selling equities as they did last month, but the fall could be gradual rather than sharp, thanks to RBI dollar sales through PSU banks.”

Too much supply

FIIs net sold shares worth ₹94,107 crore in October while DIIs purchased a net ₹1.07 trillion. Despite the DII buying, markets fell as the supply from IPOs alone was around ₹39,375 crore in October. The total paper supply was more than demand.

This month, through 6 November, excluding Thursday’s provisional figure, FIIs have sold shares worth ₹14,358 crore, making them sellers of ₹18,660 crore in the current fiscal year so far. To be sure, they turned net sellers only late last month, after being net buyers of ₹89,717 crore from April to September.

“The supply of paper through IPOs and QIPs in the primary market and PE sales in the secondary market has been more than the inflows of mutual funds by a factor of two times,” explained Ashish Gupta, CIO at Axis Mutual Fund, as the reason why markets were falling despite DII purchases matching FII sales.

“For the supply and demand to match, FIIs are needed to absorb the paper supply but they have been selling amid disappointing quarterly results and rising bond yields in the US,” added Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.

A Motilal Oswal interim review of Q2 results as of 31 October showed that 34 out of 50 Nifty companies as of 31 October reported flat earnings growth year-on-year versus an estimate of 2% plus growth in the quarter, leading to the brokerage pruning estimated Nifty FY25 earnings per share by 1.2% to ₹1,059.

Holland expects the rough ride to continue if the US dollar and US treasury yields keep rising despite Trump’s avowed objective of weakening the dollar.

Bond yields

The US 10-year bond yield has jumped 70 basis points to 4.41% (Thursday intraday)—because of strong job data and rising crude oil prices—from 3.71% on 18 September, when the Fed cut rates for the first time in four years, by 50 bps to 4.75-5%.

A stronger US bond yield also induces foreign investors to divert funds from risky emerging market equities to the safety of the US bonds, explains Axis MF’s Gupta. “We will have to see the Fed commentary on inflation after today’s (Thursday IST) FOMC meet,” he added.

MSCI India has seen the highest foreign outflows last month among emerging markets (EMs), reflected by its negative gross returns of 7.65% versus negative return of 4.32% from MSCI EM index, per global index provider MSCI’s data.

Thursday’s fall was led by ICICI Bank, Reliance Industries, Trent, Hindalco and Infosys, which accounted for more than two-fifths of the Nifty’s 285-point fall.