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Change of bias or just profit taking

ICICI Securities 04 Jan 2022

What’s Buzzing:

Foreign institutional investors have sold more than Rs 80,000 crore in secondary markets since mid-October triggering long term concerns among investors.

Context: FII activity was largely muted in the second half of 2022. However, selling by FIIs in secondary markets picked up significantly since mid-October. Consequently, the Nifty witnessed its biggest decline of ~12% since April 2020. The accelerated sell-off in the markets has raised concerns among investors of an impending deep correction despite improving economic performance.

Our perspective:

Foreign investors have pumped over Rs 2.75 lakh crore during FY21 into Indian markets (April 2020-March 2021) post Covid induced 40% correction. Easy liquidity conditions across the globe coupled with better growth prospects of the Indian economy have made India the biggest beneficiary of flows across the globe. However, FY22 saw muted FII activity. After October 2021, the sell-off intensified where FIIs have withdrawn almost Rs 80000 crore from secondary markets in just over two months with the index losing almost 12%. FY21 belonged to the secondary markets while FY22 saw significant inflows in primary markets. Hence, while secondary markets saw continued outflows, net FII inflows were negative by just Rs.28000 crore from April to December 2021. Another reason for such outflows can also be attributed to the monetary tightening triggered by sticky inflation observed across the globe. Hence, given the sustained buoyancy in primary markets and huge inflows in the secondary market post Covid, the recent sell off by foreign investors appears to be more of profit booking rather than any structural worries. Indian markets were among the best performing equities across the globe with yearly gains of over 24% in 2021 on the back of improved retail participation, suggesting a widening and deepening of the markets.

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