Turbulence and Transition – How FIIs Redefined the Market Sentiment in 2024

Foreign Institutional Investors (FIIs), regarded as some of the most calculated participants in financial markets, left a strong imprint on 2024. However, rather than engaging in their usual strategic buying, they emerged as net sellers for much of the year. In essence, FIIs sold more shares than they acquired, a trend that reverberated throughout the Indian markets.

The Climax of 2024 – A Year of Heavy Selling
The final quarter of 2024 brought a dramatic shift, with FIIs engaging in aggressive selling, leading to a notable downturn in the market. October 2024 stood out, with an astonishing net outflow of ₹91,934 crore, coinciding with a steep 5.8% decline in Nifty 50 returns. This month became a defining moment for FII-led disruptions, underscoring the substantial impact their activities have on the broader market.
Despite occasional inflows, such as ₹49,793 crore in September, the broader trend of 2024 was bearish, with total net outflows reaching ₹23,628 crore for the year. This marked a striking reversal from 2023, which had recorded historic inflows of ₹174,963 crore.
The turbulence was further compounded by external factors: the US economy exhibited robust growth, supported by resilient consumer demand and business activity. This led the Federal Reserve to move towards a more hawkish stance than expected, resulting in lower-than-anticipated rate cuts & surge in US bond yields. These factors drew global investors towards better value opportunities in markets like the US and China. In just the first 21 days of January, foreign portfolio investors (FPIs) withdrew a staggering ₹52,725 crore from Indian equities, highlighting a clear preference for international diversification.

Pressure on the Rupee
This exit of foreign capital also exacerbated currency challenges. The rupee touched an all-time low against the dollar in 2024, amplifying concerns for an economy already grappling with external headwinds. The weakening currency added to the woes of Indian markets, making them relatively less attractive to global investors compared to other geographies offering better value propositions.

A Look Back – 2020 to 2023
The Covid-19 pandemic brought unparalleled volatility to financial markets, and FIIs were no exception. March 2020 saw net outflows of ₹62,434 crore, coinciding with the Nifty 50’s 25.9% decline that month. However, the panic-selling was short-lived as FIIs resumed inflows, culminating in a record-breaking ₹70,845 crore net inflow in November, driving the Nifty 50’s 12.3% gain. This period demonstrated their propensity to revert to rationality once markets stabilised.
Going ahead, 2021 witnessed consistent FII inflows, with episodes of strategic selling. October 2021 saw an outflow of ₹17,034 crore, likely driven by portfolio adjustments, but despite such instances, the Nifty 50 delivered steady returns, reflecting market resilience and growing investor confidence.
2022 marked a decisive shift in FII behaviour, with heavy outflows throughout the year. May 2022 saw ₹37,663 crore outflow, while June recorded an even higher outflow of ₹49,469 crore, reflecting global macroeconomic challenges, including rising interest rates and geopolitical tensions. The Nifty 50 faced corresponding declines of -3.2% in May and -4.7% in June. Notably, 2022 closed with an unprecedented annual net outflow of ₹109,852 crore, the largest in recent history.
The tide began to shift in 2023, with FIIs re-emerging as dominant buyers. June 2023 recorded net inflows of ₹53,298 crore, driving a 4.5% gain in the Nifty 50. By year-end, total inflows had reached ₹174,963 crore, the largest in the past two decades. This resurgence bolstered market confidence and paved the way for robust gains across sectors.

Long-term FII Trends – A Historical Perspective
The broader picture since 2000 reveals fascinating insights into FII behaviour:

• Highest Inflows: 2023 witnessed the largest inflows at ₹174,963 crore, followed closely by 2020 (₹166,589 crore) and 2010 (₹140,497 crore). The Nifty 50 also returned handsomely in these years with returns of 19.5%, 15.1%, and 17.7%, respectively.
• Sharpest Outflows: 2022 marked the largest annual outflow at ₹109,852 crore, with 2024 following at ₹23,628 crore.
• Volatile Periods: Years like 2008 (₹53,052 crore outflow) and 2018 (₹24,382 crore outflow) underscore the sensitivity of FIIs to global and domestic market dynamics.

Decoding the Rational Seller’s Mindset
FIIs are often termed “rational sellers” due to their data-driven and macroeconomic outlook. The heavy selling in 2024 can largely be attributed to global dynamics, including a booming US economy, rising bond yields, and the Federal Reserve’s cautious monetary policy. These factors shifted investor focus to markets offering superior valuations, leaving Indian equities under pressure.
However, their return to the market during recovery phases, such as 2023, showcases a nuanced understanding of value and opportunity. In this scenario, retail investors must pick up a few lessons from these heavyweights:

1. Stay the course: FII exits often lead to temporary corrections, and long-term investors can use these dips as opportunities.
2. Follow global cues: Monitoring macroeconomic trends and global liquidity conditions can provide insights into FII behaviour.
3. Diversify and hedge: Given the volatility introduced by FII actions, diversification and proper hedging strategies are critical.

Looking Ahead
With evolving global dynamics, FIIs are likely to remain pivotal to Indian markets. While the rationality of their actions is evident, unpredictability in timing and magnitude necessitates caution. Retail investors can learn to navigate these trends by staying informed and focusing on long-term objectives.
Indeed, FIIs are much more than just market participants; they are sentiment setters. Their transitions from buyers to sellers and back hold valuable lessons for market watchers and investors alike. Understanding their moves not only provides a window into the broader economic landscape but also equips investors to make informed decisions amidst market fluctuations.

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