Markets find their feet as FPIs step off pedal after brutal selloff

Foreign portfolio investors (FPIs) have taken their feet off the pedal, helping markets find their sea legs after a brutal sell-off that saw key indices drop to 13-month lows last month.

In the past fortnight, the average daily selling by overseas funds has moderated to less than Rs 1,400 crore, compared with nearly Rs 3,500 crore in the preceding fortnight. This has helped markets stage a comeback.

Since June 17 — when the Nifty had ended at its lowest levels since May 2021 — the market has surged nearly 5 per cent after dropping close to 8 per cent in the previous fortnight.

“The worst seems to be over in terms of FPI selling. Now the last leg of selling might be happening. In the past few trading sessions, the intensity of selling by FPIs has come down to Rs 1,000-1,500 crore and there is net-buying in some sessions. The data suggests that the intensity of selling is behind us. But when they will start buying in a sustained manner is anybody’s guess,” says Sachin Shah, a fund manager at Emkay Investment Managers.

On Tuesday, FPIs were net-buyers to the tune of nearly Rs 1,300 crore.

The turnaround in FPI sentiment is underpinned by a rally in bond markets since softening of global commodity prices has stoked optimism that the US Federal Reserve and other central banks will have room to be less aggressive in their fight against inflation.

The 10-year US bond yield has come off nearly 55 basis points (bps) from last month’s high of 3.47 per cent to around 2.92 per cent now. India’s 10-year government bond yields, too, have softened 25 bps from last month’s high of 7.62 per cent.

Experts say softening bond yields suggest fears around aggressive monetary tightening have eased. Also, in recent months, the US bond yields and flows into emerging markets (EMs) have shown strong correlation.

Experts say the dollar has to weaken for EMs to witness sustained foreign flows.

“Since the end of June, FPI selling has been showing a declining trend. If market rises in July respond to good first-quarter results, FPIs may again sell. This trend will be halted only when the dollar stabilises and the US bond yields decline,” says V K Vijayakumar, chief investment strategist at Geojit Financial Services, adding, “FPIs are selling more in countries with rising current account deficits like India’s since their currencies are more vulnerable.”

On a year-to-date (YTD) basis, FPIs are net-sellers of around Rs 2.2 trillion ($29 billion). This is the worst sell-off Indian markets have witnessed in the first six months of a calendar year. The Nifty is down 8.9 per cent YTD; the Nifty Midcap 100 and the Nifty Smallcap 100 are down 12.3 per cent and 24.5 per cent, respectively.

Strong domestic inflows have helped cushion market fall, else the markets would have seen deeper cuts due to relentless FPI selling, say experts.