Stock market: Large FPI outflows ahead? All eyes on retail investors, DIIs

With foreign outflows hitting Rs 51,748 crore in January so far, Kotak Institutional Equities believes the Indian economy could see modest collateral damage in the case of a prolonged ‘fight’ between foreign portfolio investors (FPIs) and domestic institutional investors.

The broking firm believes that India could see large FPI outflows with DIIs providing an exit to FPIs around current ‘high’ valuations. This, it said could lead to issues with balance of payment (BoP), forex reserves and liquidity.

"The stock market could come off if DIIs/retail investors were to take a more cautious view, leading to lower FPI sales (on lower valuations) but fewer negatives for the economy," Kotak Institutional Equities said.

In total, FPIs sold a net $17.2 billion worth equities since October 2024. In the secondary market, they offloaded $23.5 billion worth equities. During the same period, DIIs purchased $28.7 billion worth stocks.

What FPI selling suggests
Kotak assumes the unabated selling by FPIs reflects no inflows into or even outflows from GEM and India-dedicated funds and low conviction about the India stock market. They perhaps find market valuations expensive, Kotak said.

There is no denying that valuations are high across the board except for financials relative to pre- pandemic levels. We doubt the circumstances and convictions of FPIs will change anytime soon given a combination of a consensus positive view among asset allocators and global investors about the US market and very poor returns of emerging markets (EMs) for the past several years.

Besides, it cited rising tensions between China -- a large weight in EM indices, and the US and the “America First” policies of the new US administration creating more uncertainty among asset allocators and investors.

Why are DIIs  buying?
The continued buying by DIIs perhaps reflects large inflows into domestic equity mutual funds and their high conviction about decent returns from the market. They perhaps find valuations attractive, Kotak said adding that it assumes retail investors to continue pouring in money to domestic equity mutual funds, as they seem to have a price-agnostic investment philosophy.

"This has worked well in the past but (1) the diminishing trailing returns and  severe correction in several stocks across caps. and sectors over the past 6-9 months may dent the confidence of retail investors," it said.