The festive month of October 2024 has witnessed a record-breaking withdrawal of funds by Foreign Institutional Investors (FIIs), who have sold nearly $10 billion worth of Indian stocks. This surpasses the previous worst sell-off of $7.9 billion during the Covid-led market crash in March 2020, marking October as the highest-ever month in terms of FII outflows. FIIs offloaded stocks worth over ₹83,000 crore, as highlighted by NSDL data.

Despite this, Domestic Institutional Investors (DIIs), including mutual funds, have stepped in to absorb much of the selling pressure, buying ₹74,200 crore worth of stocks so far in October. However, this does little to soothe concerns about the Indian stock market's vulnerability to foreign investor sentiment.

Comparison with March 2020 Market Crash

During the March 2020 Covid-driven market collapse, Nifty plummeted by 23%, even as DIIs matched the FII selling spree with ₹55,595 crore worth of buying. In October 2024, though Nifty has dipped by about 4%, retail investors have largely remained calm, a stark contrast to the panic seen during 2020.

While the higher base in the current scenario has helped buffer the impact of FII outflows, this month’s foreign fund exit still reflects a worrying trend, especially as global markets shift focus to other opportunities.

FII Shift to China: 'Buy China, Sell India'

The core reason for the exodus of FIIs from India is the 'Buy China, Sell India' trade. As per Elara Securities, foreign fund flows into China have continued for the fourth consecutive week, with $18.7 billion inflows in the last month alone. In contrast, India’s FII inflows have slowed down for the first time since 2022, making it evident that foreign investors are finding better value in Chinese markets.

China’s Hang Seng index is up 14% in the last month, while the Shanghai CSI 300 index surged by 22%. Comparatively, India's Nifty has declined by 4%. Investors anticipate that China will implement meaningful economic stimuli, which could bolster growth not only in 2024 but also extend into 2025-2026. Macquarie strategist Viktor Shvets highlights that China's focus on stimulating its economy, rather than geopolitical tensions, is drawing FII interest.

DIIs' Record-Breaking Buying

While FIIs continue to exit, DIIs have shown steadfast commitment to the Indian stock market. So far in 2024, DIIs have made a record ₹4 lakh crore in purchases, demonstrating their confidence in India's long-term growth story.

Concerns Beyond the China Story

While China’s attractiveness has clearly been a factor in FIIs’ exit, several other issues are weighing on Indian markets. One of the biggest concerns is the overvaluation of Indian equities. India’s Nifty50 is trading at a much higher price-to-earnings (P/E) ratio of around 23, compared to Hong Kong’s Hang Seng index at just 12, making Indian stocks less attractive to value-focused investors.

Additionally, corporate earnings for Q2 FY25 have been lackluster, further dampening investor sentiment. Auto stocks, for instance, faced a sell-off after Bajaj Auto reduced its growth estimate for the two-wheeler industry to 5% year-on-year for FY25, down from 8%.

Even Nifty heavyweight Reliance Industries (RIL) has not been immune to this pressure, as its Q2 results failed to impress, leading to target price cuts.

Stronger Dollar Impact

Another factor contributing to the FII outflows is the rising strength of the US dollar. The dollar index has crossed the 103-mark, putting pressure on emerging markets like India. As Ajay Bagga, a market veteran, noted, elevated market levels leave very little room for bad news or missed earnings.

Divided Opinions on China Stimulus

Interestingly, the global fund management community remains divided over China's stimulus approach. While some believe that China's recent economic pivot will lead to sustained growth and are bottom-fishing in Chinese stocks, others view the stimulus measures as underwhelming, particularly in areas like consumption and real estate.

Macquarie’s analysis suggests that China's recent moves are aimed at de-risking and supporting growth targets rather than addressing deeper structural issues, such as high savings rates and dependence on investment and exports. Additionally, with US elections on the horizon, trade tensions with China are expected to escalate, potentially impacting global investor sentiment.

Conclusion

As October 2024 records the worst-ever FII selling in India, the impact on the stock market has been mitigated by strong domestic investor participation. However, concerns over overvaluation, a lackluster earnings season, and a rising dollar could continue to weigh on Indian equities. At the same time, the 'Buy China, Sell India' trade is reshaping global investment flows, with foreign investors eyeing better value and growth prospects in China.

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