Historical FII Selling Patterns
According to Zafar Shaik, whenever Foreign Institutional Investors (FIIs) have sold heavily in the past 20 years, the market has gone down. If we analyze past data, FIIs sold significantly in 2011, 2013, 2015, 2018, and 2019. Major selling also happened during COVID in 2020, followed by another wave in 2022. Now, we are once again seeing a phase of heavy FII outflows.
How Domestic Institutions Are Balancing FII Outflows
Earlier, whenever FIIs sold, there was no significant domestic participation to counter their impact. But now, domestic institutional investors (DIIs), including mutual funds and insurance companies, are absorbing a large part of the FII selling. This means that even though FIIs are selling aggressively, their impact is not as strong as before. However, since FIIs drive market sentiment, their selling often causes panic among retail investors.
Why Are FIIs Selling?
One of the major reasons FIIs are selling is the strong performance of the US market and the depreciation of the Indian rupee. If an FII earns 12% in the Indian market but loses 4% due to currency depreciation, their net return drops to 8%. Meanwhile, the US market has given a 28-30% return in the past year, making it more attractive for them to allocate funds there. This leads to periodic outflows from emerging markets like India.
FII Outflows Are Cyclical
Looking at past trends, FII selling does not last forever. It happens in cycles, usually every 2-5 years. Whenever the US market starts correcting, the dollar index weakens, or Indian valuations become attractive again, FIIs return. The same has happened multiple times in the last 15 years. Thus, while the current selling phase may cause concern, it is not a permanent trend.
Market Outlook and What to Expect
Based on historical patterns, we might be in a consolidation phase similar to 2010-2011, where the market moves sideways for some time before beginning its next rally. It is important for investors to remain patient and not panic over FII outflows. Markets work in cycles, and just as FIIs have exited, they will likely return when conditions become favorable.
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