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How Coronavirus Hit FII Flows - 6 Points

Mar 21, 2020

With the ongoing panic in the global as well as Indian stock markets, there is no end to foreign investors dumping Indian shares.

This wasn't the case a while back. Foreign institutional investor (FII) were making a beeline for Indian equities few months back.

How has this trend been so far this year? What has changed in recent weeks and months? And what's behind the heavy movement of foreign funds in India?

Let us look at some key points to answer these questions...

  1. September 2019: FII Money Returns to India Again

    If we track the trend of FII flows in financial year 2019-20, after the Union Budget in July 2019, foreign investors began selling. They pulled out a ton of money from Indian equities.

    Why? Well, they were disappointed with the budget as it did not address the key concerns the economy was facing.

    However, the month of September was a different ballgame altogether as foreign money once again made its way into Indian equities. Not surprisingly it was also the month in which the Government made amends for its failed budget.

    This is evident in the chart below:

    September 2019: Foreign Money Returns to India Again

  2. 3rd Quarter 2019-20: FIIs Keep Pouring Money in Indian Equities

    There were two reasons behind the above FII rush to Indian equities:

    1. Clarification by the FM that the tax on the super-rich was not applicable on foreign investors
    2. Cut in corporate tax rates, among other efforts, that had the potential to make Indian manufacturing globally competitive

    Both the above points strengthened the case for investing in Indian for FIIs.

    And they kept on pouring money in the following months.

    Here's how much money came by FIIs to Indian stock markets in the third quarter of FY20:

    Month Net Investment (Rs, m)
    Oct-19 85,956
    Nov-19 129,249
    Dec-19 6,941
    Total 222,146
    Data Source: Equitymaster
  3. 2019: Best FII Flows in Six Years

    Overall, in calendar year 2019, FIIs pumped in a net of more than Rs 1,000 bn (billion) in Indian stocks. This made it their best such infusion in six years. The previous high was Rs 1,130 bn in 2013.

  4. 2020: The Downtrend Starts

    The buying trend, however, didn't last long. FIIs rushed out of India amid concerns of slowing economic growth and high stock valuations.

    In the month of January, they pulled out Rs 126.8 bn from Indian stock markets.

  5. Feb-Mar 2020: Coronavirus Triggers FII Sell off

    The selling intensified further in February and March 2020. The major trigger was the coronavirus led panic sell-off across global financial markets.

    In February and March, Nifty and Sensex corrected sharply. It was not just Indian share markets but even global indices like the Dow Jones, NASDAQ, FTSE, DAX, CAC and the Nikkei that witnessed the brunt.

    In the Indian context, the stock market correction was exacerbated by the weak foreign investor sentiments. The real surprise was not the FII selling. It was the ferocity and the intensity of the selling in such a short span of time.

    From February 14th, the FIIs have been sellers on all days except one.

  6. March FII Outflows to date to Surpass the 2008 Crisis Level

    So far in March, FIIs have sold a net of Rs 478.9 bn of Indian shares.

    And this makes the outflows of the month set to surpass the 2008 crisis level.

    While India is still better placed relative to other emerging market peers, the wipe-out has been massive.

What Should Market Participants Do?

There is no denying that FIIs play an important role in the Indian stock markets.

Strong FII participation is good from the domestic investors' point of view in the sense that it leads to enhanced liquidity and greater depth in the market.

However, in the event of FIIs pulling out on a larger scale and a free fall in the markets, the correction in valuations of fundamentally solid companies would be just temporary. It may in fact offer some lucrative value buying opportunities.

How do you zero in on these opportunities?

Our special report, How to Trade the Coronavirus Crash, has the answer. Just claim your FREE copy here...

Monish Vora

Monish Vora is a keen student of the markets and shares his observations through his clear and concise commentary.

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