The relentless sell-off of stocks by foreign institutional investors or FIIs is expected to “weave” by the end of the current month, according to an analysis of FII fund flows in India by Maximus Securities Research.
“FII selling is expected to decline by the end of March 22, after which we expect normal market forces to operate based on the attractiveness of scrip and index valuations,” the company said in a statement. report released today.
The broker based its conclusion on one logic primarily – FIIs are likely to withdraw all the ‘excess capital’ they injected into India due to the ‘quantitative easing policy’ or stimulus 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 stay in India, and that the current withdrawal of foreign funds will mostly only include money that came in after the US Federal Reserve began feverishly printing dollars to weather the impact of COVID-19.
Foreign institutional investors – comprising mutual funds, pension funds, hedge funds and others – pumped billions of dollars into India every year even before the US Federal Reserve started pumping hundreds of billions of dollars. each month in the aftermath of the pandemic.
For example, in the 12 to 13 months before the pandemic (February 2019 to February 2020), these investors invested a total of around $21 billion (Rs 1.6 lakh cr in the current valuation of the rupee).
This was three times what Indian institutional investors – such as Indian mutual funds, insurance companies, banks and others – invested in the same period, a total of Rs 53,000 cr.
The mega infusion of over Rs 2 lakh cr by both sides led the Nifty 50 index to rise by around 11% during this period from 10,834 to 12,033 points.
In contrast, during the pandemic period (February 20 to September 2021), IFIs alone pumped in around $26 billion or around Rs 2 lakh cr.
This translated into much larger gains for the Nifty, which rose from 12,033 to 17,509 points, a gain of 46% over a period of approximately 19 months.
This jump in the Nifty was largely due to the US Federal Reserve pumping trillions of dollars into the global economy to ride out 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 recording profits.
In fact, Indian institutional investor activity during the COVID period could be split into two – a month-long period of hyper-investment when the market crashed due to COVID fears, followed by a longer period. long of profit booking when the market started to go up with the return of FII and Fed money.
In terms of raw numbers, Indian institutional investors pumped out Rs 47,438 cr during the month-long period from Feb 20, 2020 to March 24, 2020 when the market crashed, and over the next 18 months they sold shares worth 67,715 cr as the market zoomed in, making a good comeback.
While domestic institutions have proven to be smarter than foreign institutional investors during the COVID period, the same has not been the case for the post-COVID period (last five months).
For example, in the post-COVID period from October last year, it was foreign institutional investors that saw profits, while domestic institutions were busy buying stocks that were under -evaluated by foreign institutions.
Interestingly, the same national institutions that sold these stocks when the Nifty was between 12,000 and 15,000 were busy swallowing them when the Nifty was between 18,000 and 16,300 in the post-COVID era. (last five months), so buy back the shares at higher prices.
In fact, it is precisely because of this “hunger” for stocks by domestic institutional investors that the market has remained high in the post-COVID phase (last five months), which has only hurt domestic institutions. because they had to buy those shares. at a high valuation.
Had domestic institutions exercised restraint as foreign institutions began selling in October, the Nifty would have fallen into the 12,000 range and they could have repurchased those same stocks at much lower valuations.
Be that as it may, over the past five months, FIIs have sold a total of $18 billion or around 1.4 lakh cr worth of shares in the Indian markets, while domestic institutions have bought for 1 .55 lakh cr of shares.
In other words, the national institutions have fully absorbed the impact of the sale of the FIIs, preventing the market from falling and allowing the FIIs to make handsome profits on their investments.
END OF GAME
Now comes the end of the game, which will determine who won and who lost.
According to Maximus Securities, FIIs have invested $26 billion net during the COVID period. As they have already sold $18 billion, this leaves only $8 billion of their net investment from the COVID period still outstanding in the Indian market.
“About 70% of the drawdown is already complete as we approach the Fed’s March 16, 22 meeting confirming the rate hike,” he noted.
Therefore, he expects about $8 billion more of the FII’s money to come out in this current phase of withdrawal, which is expected to happen by the end of March.
After that, he said, markets will stabilize and normal trading will take place.
However, there are two assumptions made by the brokerage in its report.
The first is that since the FIIs have invested $26 billion, they will only withdraw $26 billion. This assumption ignores the fact that the $26 billion that FIIs have put into the Indian market could currently be valued at $30-32 billion, since the level of the market has also increased.
So instead of $8 billion left to be withdrawn, there could be around $12-14 billion left to be withdrawn, and so that could stretch into April.
The second major assumption is that FIIs will only withdraw money that was invested from the Federal Reserve’s COVID stimulus, not from its previous rounds of stimulus.
The US Federal Reserve had pumped trillions of dollars into the global economy even before COVID-19 hit, in the name of helping the US economy recover from the impact of the 2008 financial crisis. In other emerging markets, India also got some of the trillions the US Fed threw in the market, helping boost Nifty from 5,000 to 12,000.
Now that the US central bank has started its policy of quantitative tightening or withdrawing the money it injected, it is unclear whether it will stop after recovering the funds it injected as a COVID stimulus. , or if it wants to withdraw the stimulus fund linked to the 2008 financial crisis. If so, then Nifty could go down to 8000 or 8500 before the US Federal Reserve is done with its monetary tightening.
For now, however, it is still unclear what the US Federal Reserve intends to do and when it will stop its monetary tightening process. The fate of Indian stock markets also depends on this crucial fact.