FIIs, drop your FOMO, India means business

FIIs have pulled out a solid $7 bn from Indian equities in October. As a result, Nifty is down by over 2% in a fortnight. A month ago, Nifty gained around the same in percentage terms as FIIs pumped in roughly similar amounts. The proximate reason for FIIs to rebalance their emerging market portfolios in favour of China remains unclear due to sketchy details about its economic stimulus. Data from the US indicates there could be more legs to the Wall Street rally, which may be damping demand for Chinese equity. The US presidential elections are playing on investor sentiment with trade curbs on China a distinct possibility. Tension in West Asia aids the flight to security. But, frankly, the scope for escalation appears limited.

The FII pullout from India could have been more intense were it not for these mitigating factors. Even if they had pulled out more money, would they have been able to engineer a significant price correction? Indian MFs are sitting on over three times as much cash as the FII equity sales in October. Dips simply get bought into, and the funnel for household savings entering the stock market keeps widening. Domestic capital flow into Indian stocks has reached a point where the flight of FII money has a lower impact on volatility. Their concern over stretched valuations is being counteracted by retail investors with greater faith in a structural bull run on Dalal Street.

Valuation could become a key driver of FII investment in India. At a distance from fundamentals, prices would need to adjust to levels that offer FIIs comfort. External factors influencing FII flows must be placed against the perspective of India's market dynamics. The economy has undergone structural changes that may justify the faith of domestic investors. Frankly, foreign investors need more convincing. India will remain a long-term play. However, it needs to demonstrate greater resilience when alternative trades emerge.