Why FIIs are selling?

13 Mar 2025 , 02:41 PM

FIIs play a pivotal role in India’s economic and financial landscape. They bring significant foreign capital into the country, which acts as a catalyst for economic growth. However, recently, FIIs in India are on a selling spree, leaving no sectors untouched, despite a Budget that was widely seen as consumption-friendly.

FII selling began in the middle of Oct’24 when the global betting and currency markets started pricing in a Trump victory.  FII’s long short ratio in the index has come down to 0.23x with total FII index short contracts totalling 228k as of 7^th March 2025, indicating extreme pessimism.  FIIs have sold more than Rs 3.56L crores in the cash market since October and over Rs 1.74L crore CY25 YTD. There are several reasons for FII selling in India, some of which include:

US becoming increasingly attractive: US yields have also gone up from 3.8% to 4.3% in the last four months, making US fixed income very attractive. US equities are also expected to do well based on strong growth momentum in the US economy and favourable tax and deregulation measures expected from the Trump administration. The USD has also strengthened, with the DXY reaching levels of 109, which signals tough times for EM growth. DXY has now corrected to 104 levels.

Cyclical Slowdown in India: India’s GDP growth has slowed from 8.2% in FY24 to 6.2% in 3QFY25. We cut our FY26 GDP forecast to 5.75% from 6% earlier. This is due to 1) uncertainty from Trump’s unpredictable trade policies potentially obstructing private capex globally and in India; 2) RBI’s defence of the rupee that will hurt export competitiveness, liquidity, FX reserves, and FDI; 3) government’s misplaced shift from spurring capex to private consumption because over long periods of time, consumption growth remains fairly stable and cannot be easily forced up.

RBI’s currency defence: RBI has been defending the INR against the USD. RBI’s FX reserves are expected to have come down to almost US$550bn from US$710bn 4 months ago. There is an expectation that at some time, RBI will stop defending the rupee, and the rupee will sharply fall, perhaps to 90 v/s the USD. This too hastens FII selling.

Sluggish corporate earnings: 2QFY25 was the first quarter in many years to witness significant earnings downgrades, followed by 3QFY25. Volume growth is weak and rural is doing relatively better than urban plays.

Owing to the above reasons, and the FII selling which followed, has led to FII shareholding falling to 16%, down from 20.2% recorded in January 2015. As of February, FIIs’ assets under custody stood at Rs 62.38 lakh crore, which was a 13-month low. It is down by Rs 15.58 lakh crore from the peak of Rs 77.96 lakh crore recorded in September 2024.

In CY24, FIIs trimmed in large caps but increased in SMID (taking more risk within overall selling context). At 21.2%, FII stake in Large Caps is significantly higher than in SMID. FII overweight in Private Banks w.r.t. MSCI continues to be significantly higher at 7.7ppt compared to Domestic Mutual Funds (DMFs) overweight at 0.6ppt. In IT, FIIs are 0.8ppt overweight compared to -0.7ppt for DMFs. Cap goods, Defence, Auto Ancillaries, Cement are all sectors with FII underweight with DMFs ow. In Autos, FIIs went underweight in 4QCY24 compared to a small overweight position a quarter earlier, the opposite happening in IT.

However, the trend seems to be reversing with early indicators suggesting a slowdown in FII selling. In the first six trading days of March, FII selling in the cash market has been lower than the previous day. This aligns with our forecast that the Nifty 50 index is likely to make a trough at 22000, a level which it has already reached in March. The index is currently trading at 1Y forward P/E multiple of 18.4x and is at par with the 10-year average. This presents a long-term opportunity for the investors as the index is valued reasonably, offering a margin of safety and limited downside risk.

~Jayesh Bhanushali

Fund Manager – Equities