Rs 50 lakh crore gone in bull market disaster! Time for FIIs to come back?

The brutal FII selling that has wiped off nearly Rs 50 lakh crore from the Indian stock market ever since the bull market ended less than two months ago is now giving early signs of a U-turn before the Santa rally season begins in December-end.

The pace of sell-off decreased to just about Rs 2,500 crore in the second week of the month after the first week saw foreigners decamping with nearly Rs 20,000 crore.

CLSA has already announced that it will reverse its tactical allocation in early October, returning to a benchmark on China and a 20% overweight on India. And now analysts are expecting that FIIs will reduce their selling as we near the end of the calendar year.


"The new framework established by the RBI and SEBI for reclassifying foreign FPIs as FDIs is expected to positively impact foreign inflows into India. This framework provides greater flexibility for foreign investors and reduces barriers to entry. With the new regulations, FPIs can hold larger stakes in Indian companies without the need for immediate divestment. This creates opportunities for increased foreign investment, particularly in mid-cap companies, and helps attract long-term capital," said Vipul Bhowar of Waterfield Advisors.

But fresh allocations or significant investments are likely to occur once there is greater clarity on Trump administration's policies.

Also read | Nifty can fall another 10% by year-end to push India into bear market, warn analysts

Since the September 27 peak, MSCI India has lost about 12% of its value in US dollar terms while Nifty is 10%.

"Paradoxically, India has recorded steady net foreign investor selling of a cumulative US$14.2bn since early October (almost fully unwinding the US$16.6bn of net purchases from June through September), while investors we have met over the year have been waiting specifically for such a buying opportunity to address underexposure to what is arguably the principal scalable growth opportunity in EM," said CLSA's Alexander Redman.

If the FII outflows stop, even without new inflows starting, the domestic inflows themselves are likely to cause a market upswing, analysts say.

"Also, as the Trump administration policies start getting clarity the FII inflows are likely to come back to developed and emerging markets," Dr. Vikas Gupta of OmniScience Capital said.

As India Inc's Q2 earnings season turned out to be worse since 2020, valuations have become a big concern not just for FIIs but as well as for many domestic investors.

However, after the recent corrections analysts find the valuations to be more palatable.

"Risk-reward is fairly balanced in the markets at this stage. A balanced approach, tailored to individual risk tolerance and investment goals, would be advisable. Any incremental allocation can be equally split between Fixed Income and Equities and any further fall in the markets can be utilised to increase equity allocation," said Axis Mutual Fund's Jayesh Sundar.

Market watchers expect Q3 to show some partial recovery, and Q4 could be notably stronger.

"While there may be short-term volatility, especially in Q3, we believe the market should begin to stabilize and gain momentum by the fourth quarter, provided that fiscal spending and growth prospects align as anticipated," said Meeta Shetty, Fund Manager, Tata Asset Management.

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