“October Sell-Off: Why FIIs Are Pulling Out of Indian Markets”

Unpacking the Factors Driving FIIs Away from Indian Markets.

October month was a turbulent month for Indian equities, experiencing significant volatility and rampant outflows across several key sectors. The above data shows pronounced decline in foreign investor sentiments as nearly all sectors experienced heavy investment withdrawals, reflecting heightened market uncertainty.

The above data shows sector wise net investments of FII’s from the month of July to October. Out of 24 sectors, ~60% of the sectors experienced outflows. In the second quarter of FY25 ie. from July to September, Indian equities saw a total inflows of 97,408 cr. Rupees , while in the alone month of October we experienced a massive outflow of 94,017 cr. Rupees.
This outflows show a period of market anxiety and if this sharp downturn trend continuous it could point to challenging economic environment ahead.
The most hit sectors in this period are:

1. Automobile and Auto Components :In the July month it gained a net investment of 6,148 Cr. and by the end of October it suffered a net outflow of 10,440 Cr. From a positive inflow to a major outflow indicating a significant investor retreat.
2. Capital Goods :In July it secured investments worth 4,927 Cr. and by October it suffered outflows worth 2,786 Cr. The investment swing is a -153% change , showing increasing volatility.
3. Chemicals :This sector was a good bet for the FPI’s as in the month of October it saw net inflows of 583 cr. as compared to net outflow of 512 cr. in the month of July.
4. Financial Services :This the most uncertain sector amongst all as it is the backbone of any economy and is very difficult to analyse. in the four month period the FII’s have withdrawn a staggering amount of 18,515cr. Alone in the month of October, the financial service sector have contributed 27.8% or one fourth of the total outflows of the net investments for the particular month, suffering the net decrease of 26,139 cr.
5. Healthcare :In the second half of October month only the healthcare sector experienced net inflow of >2000 cr. Overall this sector has gained a total of 17,469 cr. This shows that the FII’s are still bullish on this sector.
6. Oil, Gas & Consumable Fuels :This sector saw a stark contrast between early inflows and severe outflows in October. From 1,944 cr. in early July to -12,371 cr. in early October has affected all the companies in this sector severely. The main reason behind this can be contributed to the ongoing war between Israel and Iran which directly impacts the prices of the crude oil.

The reasons for the selloff in the month are given below

• US Presidential Elections Stirring Uncertainty.
  Global investors are keeping a close watch on the outcome, which could shake up economic policies worldwide. As the outcome was in favour of India not many economist believe it.
• China’s Stimulus TemptationOne of the big reasons for the FII exit is China stepping up with some pretty tempting stimulus measures. China wants to get global investors back, and with these new incentives, FIIs see potential for higher returns there.
• Premium Valuation of Indian MarketsHere’s where valuations come into play. The Indian market isn’t exactly cheap. The long-term median price-to-earnings (PE) ratio of the Indian market, since 2007, has been around 21.9. But before this recent market correction, the Nifty50 PE was over 24. In simple terms, the market was slightly overvalued compared to other emerging economies. FIIs are like seasoned bargain hunters, and when they spot better value elsewhere, they don’t hesitate to shift. With more attractive valuations popping up in global markets, India lost some of its appeal.
• Disappointing Q2 FY25 Earningsthe September quarter earnings were a real letdown. Indian companies posted net profit growth of only 3.6% in Q2 FY25, the slowest in 17 quarters. This sluggish growth came from weak revenue numbers and rising interest and depreciation costs. Even though expenses and other income crept up only a little, the market didn’t take this news lightly. There was panic amongst the retails investors.

Conclusion

The overall idea from analyzing the data is that market investments between July and October 2024 experienced significant fluctuations across different sectors, reflecting broader market volatility and changing investor sentiments due to various macro economic factors.
While things might be a bit shaky in the short run, India’s economy is actually pretty solid underneath all the drama. Don’t panic out and sell everything just because things get a little wild Just do your homework, spread your money around different investments and focus on sectors that seem to provide opportunity in the long run. Stay cool, stay smart, and keep your eyes on the bigger picture!