As Indian Stocks Sink On FII Exodus, Experts Weigh On Key Triggers, Facts, Revival

In what started as a tactical shift to China, the triggers for the record selloff by global funds ended up with more than including an economic slowdown with analysts projecting it to deepen further.

Global funds have sold stocks worth over Rs 1 lakh crore in the last 19 consecutive sessions, threatening the record 11-month rally. This massive selling has made Indian stocks see the most outflows in Asia in October.

The outflows from the country are happening as China begins a stimulus blitz—from interest rate cuts, to easing spending by local government—to revive the economy.

However, "that was not the true reason FIIs were selling as much as they are," said Rajesh Bhatia, chief investment officer, ITI Asset Management Co. The highlight is the really poor results at the peak of the market, Bhatia said. "I have never seen so much breadth of poor results as we are seeing this time."

The second highlight for the "incessant selling" is the need to move from expensive India and cheap China, Bhatia said. This was also combined with the escalation of tension in West Asia, he said.

The main reason why FIIs are selling is the interest rates in US have gone up, Bhatia said. The switch from Indian equity is happening as market participants believe that inflation in the US will again see an uptick, he said. Particularly if Donald Trump gets elected, fiscal stimulus is going to be unleashed with the long-term interest rates poised to go up, Bhatia added.

If interest rates and inflation catch up, that is bad for equities, Bhatia said. This is why FIIs have been selling in clearly what is an expensive market, he said.

The benchmark indices, NSE Nifty 50 and BSE Sensex, have fallen by about 7.87% and 7.3%, respectively, in the last 18 days after the key gauges hit fresh highs.

The broader market took the most hit. As equity benchmark Nifty 50 recorded a 2,000-point fall from its life highs, the broader markets outpaced this decline, with the gauge for smallcap stocks falling 10%.

However, domestic institutions have been consistently buying on dips, snapping up stocks worth Rs 1 lakh crore, thereby cushioning from a major fall.

Domestic stocks were "tactically" downgraded to neutral from overweight by Goldman Sachs within its Asia/emerging market allocation, due to slower economic growth and corporate profits. This comes after Bernstein Research downgraded the local stocks as it perceives the market to be "quite vulnerable" in the near term.

"I do believe that India's story is happening in the mid and small-cap space." Large-cap earnings growth is sufficient but mid and small-cap companies is where the emerging stories are, according to Bhatia.

As the markets correct and provide more "saner value", this time would be an opportunity to buy some of these stocks, Bhatia said.

India's Nifty and the 30-stock Sensex are the seventh and tenth most expensive in the Asian market in terms of price-to-earnings ratio. The price-to-earnings ratio of the Nifty is valued at 18.8, while that of the small-cap and the mid-cap index is at 32.3 and 43.3, respectively.

Meanwhile, the consistent selling of local stocks by foreign institutions has kept the rupee hovering near record-low levels. The local currency remained range-bound after hitting a record low of 84.09 on Oct. 11.

India's growth momentum is poised to moderate in the third quarter and will likely remain soft going ahead into the December quarter, in contrast to the Reserve Bank of India's bullish projection, according to Nomura Global Markets Research.

However, "there is no case of structural slowdown in India," according to Manish Dangi, co-founder and chief executive officer, Mosaic Asset Management.

There is little doubt that India is slowing rapidly in last couple of months and it appears to be cyclical, Dangi told NDTV Profit in an interview. All signals from both industrial and consumption is showing weakness right now, according to Dangi.

Every three or four years this slowdown is seen, but unlike the previous times, macro seems decent with low inflation and current account deficit, he said.

India's central bank reduced its gross domestic product forecast for India by 20 basis points to 6.8% for the second quarter of fiscal 2025.

In a concerning outlook, the collateral damage due to a delay in RBI's policy response will cause the growth slowdown to persists for longer and a little deeper before it bets stronger, Dangi said.

Concerns about a slowing economy grew further as the tax collection saw a dip last month. Gross Goods and Services Tax collection growth in September reached 6.5%, marking a 40-month low. The output growth of the eight core sectors declined in the latest reading.

Apart from the FII selling which will stop at some time when valuations are corrected, the economy will have to repair itself, Bhatia said. "We are still in a bull market as far as the economy is concerned. The macro situation is very strong, so my sense is the slowdown will turn around, but will take time."

The upside for the market to reach a new high will take some time and markets will have to digest a time-wise correction to accommodate the slowdown, Bhatia said.