The renewed selling pressure by foreign investors coincides with a sharp increase in volatility in domestic equities. The Nifty 50 has already fallen nearly 6% so far this year, while investors on Dalal Street have wiped out around Rs 19 lakh crore in the market cap in the last five trading sessions alone amid mounting global uncertainty.
The sell-off was largely caused by rising tensions in the Middle East, particularly the Iran-US conflict, which has roiled global markets and pushed up oil prices.
Foreign portfolio investors (FPIs) have been steady sellers in Indian equities in recent weeks. According to market data, FPIs sold assets worth nearly Rs 16,000 crore in the first week of March, while the first four trading sessions of the month alone saw net inflows of nearly Rs 21,829 crore.
VK Vijayakumar, chief strategist at Geojit Investments, said the short period of foreign buying seen at the beginning of the year has changed rapidly due to the geopolitical backdrop.
“February witnessed net FPI buying reversed by the Middle East conflict. Uncertainty surrounding the conflict, steady bearishness in the market, higher crude oil prices hurting the Indian economy and depreciation of the rupee have contributed to sustained FII selling,” Vijayakumar said.
He added that foreign investors may soon return as buyers until it becomes clear how the conflict will develop and oil prices cool. “FPIs are unlikely to return to the market as buyers until there is some clarity on the outcome of the dispute and the decline in crude prices. Brent crude trading above $90 is bad news for the Indian economy and markets,” he said. A sustained rise in oil prices could widen the current account deficit, put pressure on the rupee and stoke inflation, all factors that deter foreign investors.
Analysts say the current environment has led to widespread risk-off in emerging markets. Vineet Bollinger, head of research at Ventura Securities, said the short-term outlook for equities remains cautious due to currency volatility and the inflationary impact of higher crude prices.
He expects high volatility to continue in the near term, and investors are likely to favor domestically insulated sectors.
“In this environment, sectors such as capital goods and consumer durables may do well as they are less exposed to global macro risks, while globally-linked sectors may face a headwind until uncertainty eases,” he said.
Despite continued foreign sales, domestic institutional investors (DIIs) have helped stabilize the market.
The benchmark index has so far defended the 24,300 support level, largely due to domestic buying attracting overseas. However, global risk perception remains fragile.
Justin Kho, senior market analyst for Asia-Pacific at VT Markets, said increasing geopolitical tensions are driving changes in global liquidity as investors move away from risk assets.
But said, “Elevated tensions in the Middle East are prompting a significant shift in global liquidity, with investors moving away from risk assets and increasing allocations to safe havens such as the US dollar and government bonds.”
Such changes typically tighten liquidity in equity and other risk-sensitive markets as investors prioritize capital preservation.
For Indian markets, analysts say a sustained recovery in foreign flows is likely to depend on two key factors: easing geopolitical tensions and lower crude prices. Until then, the market may rely more on domestic liquidity to offset external flows, even if it remains volatile in the near term.
(Disclaimer: The suggestions, recommendations, views and opinions given by the experts are their own. They do not represent the views of The Economic Times)
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