FPIs withdrew ₹13,400 crore from Indian equities in just 2 days on US recession fears

Foreign portfolio investors (FPIs) have sold Indian stocks worth ₹13,400 crore over the past two sessions, with ₹10,073 crore sold on Monday alone, Trendlyne data showed. This significant sell-off is attributed to investor concerns over a potential U.S. recession, which has impacted market sentiment.

Monday's selling was the largest single-day decline since June 4, when FPIs sold ₹12,436.22 crore after Lok Sabha 2024 election results fell short of exit poll predictions. Following the Union Budget 2024, FPIs had turned negative on Indian stocks due to increased long-term and capital gains taxes. However, the recent pace of selling has been notably higher compared to post-budget selling.

Market mood darkens

The significant rally in global equities during 2024 has largely been driven by expectations of a Federal Reserve rate cut and hopes for a smooth economic landing in the U.S. Investors were buoyed by the prospect of lower interest rates, which were anticipated to stimulate economic growth and support market valuations.

Additionally, optimism surrounding the U.S. economy's ability to navigate potential challenges without entering a recession further fueled market gains. However, as the likelihood of a Federal Reserve rate cut drew nearer, concerns about the U.S. economy's resilience began to overshadow the positive sentiment.

U.S. job growth slowed more than expected in July, sparking fears of a recession in the United States, bringing forward Fed rate-cut expectations. Apart from the recession fears, rising tensions in the Middle East, high valuations, weak guidance from major tech companies that drove much of the 2024 Wall Street rally, and worries over a potential reverse Yen carry trade.

Amid the backdrop, investors started moving away from risky assets last week, which further intensified on Monday. The S&P 500 experienced its largest drop in nearly two years on Monday, while the Nasdaq 100 faced its worst monthly start since 2008. The VIX, often referred to as Wall Street’s “fear gauge,” recorded its most significant spike since 1990 at one point.

Among Asian markets, Indian equities remained resilient despite the global sell-off, thanks to robust retail inflows via domestic institutional investors (DIIs). In stark contrast, the Nikkei experienced its largest two-day decline on record, plummeting 18.2% over the last two trading sessions.

DIIs counter FII selling

Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said, "When market valuations are elevated, unexpected news and events trigger a market crash. This was what happened yesterday in most asset classes, globally. Fears of recession in the US and the unwinding of the Yen carry trade, along with tensions in the Middle East, contributed to the crash."

"It is important to understand that the correction in India was relatively lower compared to most markets. Once again, domestic investors came to the rescue of the market with DII buying of ₹9155 crores when FIIs sold for ₹10073 in the cash market. But for the DII buying, the crash would have been steeper," he added. 

Vijayakumar highlights several unknown factors that could impact the market, including the total volume of the yen carry trade, which he believes may influence market trends moving forward. He notes that, on the previous day, around 600 stocks in the mid- and small-cap segments hit the lower circuit limit, illustrating the inherent risks of investing in the broader market.

Despite the recent market correction, the quality of large-cap stocks remains stable. He suggests that domestic liquidity flows could aid in a market recovery and asserts that fears of a U.S. recession may be premature and exaggerated. He advises investors not to panic and recommends slowly accumulating quality large-cap stocks.

Remained net buyers over the past two months

In July, foreign investors invested ₹32,365 crore in Indian equities, driven by expectations of ongoing policy reforms, sustained economic growth, and a better-than-expected earnings season. This follows an inflow of ₹26,565 crore in June, which was fueled by political stability and a strong market rebound.

Prior to this, foreign portfolio investors (FPIs) had withdrawn ₹25,586 crore in May due to election uncertainties and over ₹8,700 crore in April, driven by concerns about changes in India’s tax treaty with Mauritius and rising U.S. bond yields.

In addition to equities, FPIs invested ₹22,363 crore in the debt market in July, bringing the total investment in debt to ₹94,628 crore for the year so far.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.