InvestorQ : Why have foreign investors been selling in Indian equities in July? Why do FIIs normally start selling in the equity markets?
Arti Chavan made post

Why have foreign investors been selling in Indian equities in July? Why do FIIs normally start selling in the equity markets?

Answer
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rhea Babu answered.
1 year ago


One factor that has spooked investors in the Union Budget is the FPI tax surcharge. This likely to apply to all FPIs structured as trusts as they will end up paying higher tax on capital gains. That is specific to the current selloff. Let me also focus on why FII sell at all in a market like India. There can actually be various reasons for the same. After all, it is about risk adjusted returns.

· FII sell when there are broad valuation concerns and if the valuation premium of the market over the regional benchmark is too high. This has been the case with Indian markets for quite some time now.

· A major reason why FIIs would sell is when the currency weakens. A weak local currency (INR in this case) is a disadvantage to FIIs because it reduces their effective dollar returns when they convert back into dollars. Stable currency is preferred.

· FIIs also tend to sell out if liquidity condition in global markets is tightening and India is part of a wider emerging market sell-off, then also you can see risk-off selling in India. Risk-off means investors getting out of risky assets and moving to safe assets.

· Another reason for FII selling could be the yield spread between Indian bonds and US bonds. We are referring to the 10 year benchmark in both cases. A typical case is when the US increases its Fed rates. That reduces the yield gap between India and the US and is an incentive for selling out of India and settling into safer havens.

· FIIs are also wary of weakening macros. For example, sustained increase in crude prices pushes up India’s current account deficit (CAD). This is specifically a problem that worries foreign investors as India relies on imported crude for 85% of its daily needs.

· FIIs are wary of big events and tend to be extremely sensitive to such events. So they prefer to stay light ahead of major events like elections, budget announcements, credit policy announcements, major policy decisions, key state elections etc. That also contributes.

FIIs normally are driven by macro rather than micro reasons for selling en masse in the markets.