Top market expert predicts FIIs unlikely to return anytime soon after nearly $2 billion selling in March

Foreign institutional investors are unlikely to return to Indian equities anytime soon after nearly $2 billion of outflows in March, as escalating geopolitical tensions and rising crude prices continue to weigh on risk appetite, market experts said.

The renewed selling pressure from foreign investors has coincided with a sharp bout of volatility in domestic equities. The Nifty 50 has already fallen nearly 6% so far this year, while investors on Dalal Street have seen about Rs 19 lakh crore wiped out in market cap in just last five trading sessions amid rising global uncertainty.

The sell-off has been triggered largely by escalating tensions in the Middle East, particularly the conflict involving Iran and the United States, which has rattled global markets and pushed oil prices higher.

Foreign portfolio investors (FPIs) have been steady sellers in Indian equities in recent weeks. According to market data, FPIs sold nearly Rs 16,000 crore worth of equities in the first week of March, while the first four trading sessions of the month alone saw net outflows of around Rs 21,829 crore.

VK Vijayakumar, chief investment strategist at Geojit Investments, said the brief period of foreign buying seen earlier in the year has reversed sharply due to the geopolitical backdrop.

“The net FPI buying witnessed in February has reversed due to the Middle East conflict. Uncertainty surrounding the conflict, the steady decline in the market, the vulnerability of the Indian economy to a sharp crude spike and the depreciation of the rupee have contributed to sustained FII selling in the cash market,” Vijayakumar said.

He added that foreign investors are unlikely to return as buyers anytime soon until there is clarity on how the conflict evolves and crude prices cool. “FPIs are unlikely to return to the market as buyers until there is some clarity on the outcome of the conflict and a decline in crude prices. Brent crude trading above $90 is bad news for the Indian economy and markets,” he said.The rising oil prices are particularly worrying for India, which imports the majority of its crude requirements. A sustained spike in oil prices can widen the current account deficit, put pressure on the rupee and stoke inflation, all factors that tend to deter foreign investors.

Analysts say the current environment has led to a broader de-risking across emerging markets. Vinit Bolinjkar, head of research at Ventura Securities said the short-term outlook for equities remains cautious due to rupee volatility and the inflationary impact of higher crude prices.

He expects heightened volatility to continue in the near term, with investors likely to favour domestically insulated sectors.

“In this environment, sectors such as capital goods and consumer durables may outperform because they are less exposed to global macro risks, while globally linked sectors may face headwinds until uncertainty subsides,” he said.

Despite the persistent foreign selling, domestic institutional investors (DIIs) have helped stabilise the market.

The benchmark index has so far managed to defend the 24,300 support level, largely due to domestic buying absorbing foreign outflows. However, global risk sentiment remains fragile.

Justin Khoo, senior market analyst for Asia-Pacific at VT Markets, said rising geopolitical tensions are triggering a shift in global liquidity as investors move away from risk assets.

“Escalating tensions in the Middle East are prompting a noticeable shift in global liquidity, with investors rotating away from risk assets and increasing allocations to safe havens such as the US dollar and government bonds,” Khoo said.

Such shifts typically tighten liquidity in equities and other risk-sensitive markets as investors prioritise capital preservation.

For Indian markets, analysts say a sustained recovery in foreign flows will likely depend on two key factors: easing geopolitical tensions and a decline in crude prices. Until then, the market may continue to rely heavily on domestic liquidity to counter foreign outflows, even as volatility remains elevated in the near term.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)