'Of the 20 trading days of January till January 28, FIIs have been selling for 19 trading days '
'When did FIIs withdraw money with this kind of intensity?'
'It never happened. It's the first. It did not happen even during the 2008-2009 financial crisis when Lehman went under.'
'Even then you did not have like a 19-day selling spree from the FIIs.'
Akshay Chinchalkar, head of research, Axis Securities, in a two-part interview to Prasanna D Zore/Rediff.com, explains threadbare the likely reasons behind the relentless selling by foreign institutional investors (FIIs).
FIIs have been on a selling spree. Beginning October 2024 they have sold Rs 256,418 crore worth equity in cash markets till January 28, 2025. This would be the fourth consecutive month when Nifty will be closing in the red.
What do you think is happening in the market right now? Why are FIIs selling relentlessly?
There are both global and domestic issues. Obviously, global issues are kind of overshadowing everything that's happening locally.
If I had to think about three major reasons why whatever is happening is happening, then I would say the US bond markets, the rising US dollar against the Indian rupee and potential Trump policies that will make US investors to make more money out of US assets than run around globally in search of fancy returns.
US bond markets: US bond markets are becoming increasingly attractive to global investors.
The 10-year Treasury yield was close to 5% a couple of weeks ago, and now it's around 4.6% (from 4.571% on January 1, the US 10-year bond yields had jumped to 4.8% on January 13 before falling to 4.5280 on January 27).
This rally in US yields is a big reason for the current market dynamics. For FIIs, this is risk-free money.
The US Treasury is the safest instrument in the world, and if it's offering 5%, why would investors come to an emerging market like India for an extra 1% or 2% while also taking on currency risk?
On the basis of purchasing power parity and interest rate parity, it's normal for the rupee to depreciate 3.5% to 4% (but the rupee has depreciated by almost 3.7% against the US dollar between October 2024 and January 27, 2025) annually. So, is it worth taking that currency risk for an extra 1% when you can get 5% risk-free in the US?
Rising Dollar: If you're a US investor, why would you convert your dollars into another currency in search of higher yields, not knowing how that currency will perform?
Instead of pondering over questions like these -- will the currency of the markets in which we invest hold off against a precipitous fall (the USD-INR pair traded a low of 83.4825 in October when the FIIs began selling and is trading at 86.5675 at the time of transcribing this interview which translates into a 3.7% fall for the Indian currency; the lower the Indian rupee goes, the higher the FIIs have to pay for converting their dollars into Indian rupee and hence reduces the profits of FIIs) that will allow me to get my money back when I have to with some return rate? -- and suffer uncertainty and sleepless nights it makes more sense for these investors to seek refuge in safety and strength of the US Dollar.
Potential Trump Policies: The third reason is the potential policies from the Trump administration that could make US assets more attractive.
If you are a large US investor with a mandate to invest globally, and the administration is telling you that US assets will be more attractive, why would your money leave the US?
If you're already sitting on 20% to 30% returns in emerging markets (like India), why not cash out and invest in a market that shows more promise?
It's pretty obvious that the effort is out there to make the life of the average American better. It became very obvious somewhere before the election got underway on November 5th that Trump had a slight edge because when the first presidential debate happened Biden didn't really help his cause.
So that's attracting the US dollars back to the US?
The point I'm trying to make is if you are a large US investor and you have a mandate to invest globally, the administration in the US itself is telling you that they will make sure US assets are more attractive than assets elsewhere.
What reason does your money have to leave the US in that case? Or if you have invested in emerging markets because you are a hedge fund manager, you have the mandate to invest anywhere you want.
If you're already sitting on 20% to 30% returns and you know you can take your money back and invest in a market that shows promise, why wouldn't you do it?
This has been evident since before the election, and markets have been front-running (a phenomenon where markets start rising today discounting future gains) the possibility of a Trump second term, similar to what happened in 2017.
With Elon Musk backing Trump, there's a lot of communication going out to the average American about making their lives better. If America is prospering, why not invest there?
What's your sense as far as Indian markets are concerned?
Where are we headed in calendar year 2025, given that Trump administration has just begun on January 20th?
How do you see the Indian markets behaving to Trump tantrums?
Can investors expect some decent returns or is it going to be a bad year for Indian investors?
I give you the current state of play and what is expected based on some data that we've crunched historically. The Nifty is already down about 12% to 13% from its record high of 26,270 in September 2024.
Since then (beginning October) the amount of FII outflow (Rs 2.56 lakh crore as of January 28, 2025) has been humongous. Of the 20 trading days of January till January 28, FIIs have been selling for 19 trading days (except January 2).
The more interesting statistic, and the next logical question might be, when did FIIs withdraw money with this kind of intensity?
It never happened. It's the first. It did not happen during the 2008-2009 financial crisis, when Lehman went under. Even then you did not have like a 19-day selling spree from the FIIs.
In today's trade (January 28), I saw the Nifty up like 300 points, but in the last 30 minutes it gave half those gains.
Let's not be in denial. Something's clearly wrong here.
Coming back to your question, I tell you we are about a per cent away from the trend line drawn from COVID low when Nifty fell to around 7,500 in March 2020.
I do a lot of charts and data visualisation. There's a very long term trend line that's starting from those COVID crash lows, which is about 1% away from where we currently are (22,957, close as on January 28, 2025).
This trend line has actually worked in the past in arresting a couple of declines. It's already established (in technical parlance, a trend line is a line that is drawn by connecting the lows at various time intervals; when the market bounces off from that line and makes news highs and if it happens on a number of occasions then that trend line is considered as established or offers good support) that that trend lines matter and now we've come within close proximity of that trend line.
Nobody knows whether we're going to hold it and go back up, do some sort of a recovery or whether it's just going to fall off (go below the black trend line shown in the image).
But when a trend line has been validated (established) in the past, we know how important it is for the market to hold itself or just fall through the floor without making an effort to recover; I don't think that it (Nifty going below the trend line) is going to happen.
If you ask me, that area between 22,500 and 22,800 is absolutely pivotal.
While the FIIs are selling domestic institutional investors (DIIs) are pumping in money. By some estimates anywhere between 25,000 crore to 26,000 crore SIP money that is invested into mutual funds is coming into the market.
Isn't that money enough to stem the fall in the Indian markets?
Or are mutual funds also sitting on cash?
Are domestic institutions also sitting on cash?
Are they thinking that sitting on cash is also a strategy to make money?
That's a very interesting question. The level of selling by FIIs has been overwhelming, almost like a flood.
Domestic institutional investors (DIIs) have a limit to how much cash they can deploy since they are accountable for fund performance relative to benchmarks.
Even if DIIs have excess cash to deploy, they must consider market volatility, which moves in cycles. Many investors wake up hoping for a market recovery, only to see it end lower by the day's close.
Adding to the uncertainty is the global economic landscape. While many expected Trump to introduce tariffs immediately, that hasn't happened yet, which has actually helped the US market outperform.
This outperformance comes at the expense of emerging markets like India.
If the 'Make America Great Again' agenda drives capital back to US assets, then money will continue flowing out of emerging markets. But what happens if the US market itself starts to decline? Will that money return to emerging markets?
Likely not -- it will probably follow the US market downward. Given this, it's difficult to imagine a scenario where the S&P 500 drops 10% in a month while Indian markets hit new highs.
Domestic institutions must also consider their available capital. The idea of aggressively buying while FIIs are selling hasn't worked well so far.
Markets function through buyer-seller interactions. If large foreign funds, with extensive research capabilities, decide to exit India for the next six months, they may sell at any price.
If they are willing to sell at Rs 100 today and at Rs 90 tomorrow, it shows their confidence in continued declines. The real question is: Are domestic investors willing to buy at any price? Given their accountability to investors, the answer is often no.
Historically, domestic institutions have not been great at perfectly timing market bottoms and tops. They tend to wait for signs of stability.
This means that after a market rally of 5%, with some stocks gaining 15% ti 20%, they might feel more comfortable stepping in. But with sustained selling, they lack both the confidence and resources to absorb the sell-off entirely.
Another factor is market behaviour over the past few years. Previously, even during periods of downside volatility, markets would quickly recover and make new highs.
However, this time, the market has been falling consistently for months -- something many newer investors have never experienced.
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