Are FIIs leaving India?

The BSE 500, a popular Indian equity market index, has seen a drawdown of 8.2 per cent in October 2024. At the time, we witnessed a net outflow of approximately Rs 1 lakh crore, or $11.5 billion, from the Indian equity markets, marking one of the largest FII (foreign institutional investor) outflows in recent times. For perspective, FIIs withdrew a net total of about $15.4 billion between January 2008 and March 2009 during the GFC (Global Financial Crisis). In another instance, FIIs withdrew $10.6 billion between February 2020 and April 2020 during the Covid-19 crisis.

Despite the massive outflows, the equity market saw only an 8.2 per cent drawdown from September to October 2024, supported mainly by DII (domestic institutional investor) buying. It appears unusual that even after such large withdrawals, the recent market correction is nowhere near the 66 per cent and 37 per cent drawdowns seen during the GFC and Covid-19 crisis, respectively.

Understanding the reasons for the softer-than-expected decline

As of October 2024, Indian equity market capitalisation hovered in the range of $5.3 trillion to $5.5 trillion (or $5,300 billion to $5,500 billion), depending on the day observed. Of this, FIIs held around 17-18 per cent, amounting to anywhere between $900 billion and $1,000 billion. Therefore, an outflow of $11.5 billion represents just over 1.2 per cent of FII holdings, or about 0.2 per cent of our average equity market capitalisation during this period.

How different sectors have been hit

The broader market does not fully reflect the pain some investors experienced during this period. As they say, the devil is in the details. While the broader equity market indices fell 8-10 per cent, many sub-segments have seen declines of a larger magnitude. Indices representing themes and sectors such as Defence, Public Sector Enterprises, Oil and Gas, Real Estate and other high-beta segments have experienced substantial corrections from their recent 52-week highs.

As shown in the table below, some sectors fell by 15-26 per cent during this period. Meanwhile, sectors like Healthcare, IT and Financial Services showed resilience, with their sectoral indices down by 3-6 per cent.

Summing it up

While the $11.5 billion net outflow by FIIs appears significant at first glance, it's essential to consider that our market capitalisation has grown exponentially over the years. As a result, this seemingly large amount is only a fraction of our total market capitalisation and FII holdings in the Indian equity market. Rather than focusing on the absolute amount, one should look at relative figures - that is, outflows or inflows as a percentage of average market capitalisation or FII holdings.

We can also see sector and theme rotation in the market. Sectors, themes and investment styles that traded well above their fair valuations and performed exceptionally over the last three years saw corrections in recent months. Could this be a trigger for previously underperforming themes to make a comeback? Only time will tell.

Manuj Jain, a CFA charterholder, is a Director and Head of Product and Strategies at WhiteOak Capital Asset Management Company. He has been with the company for three years and has over 16 years of experience in asset management. Part of the WhiteOak Capital Group, WhiteOak Capital Asset Management Company is the sponsoring entity of WhiteOak Capital Mutual Fund.