India Records Worst FII Selloff Among Emerging Markets In May

India recorded the highest foreign fund outflows in May among emerging markets as election uncertainty created panic in Dalal Street.

Overseas investors have been selling domestic equities since the start of the month on fears of the uncertain election verdict due to the less-than-expected voter turnout in the Lok Sabha elections.

Foreign institutional investors have been selling Indian stocks during all the sessions except two, according to the provisional data from the National Stock Exchange. They have pulled out around $2.97 billion from the Indian market so far this month.

The uncertainty in the Lok Sabha elections is causing concerns for Foreign Institutional Investors, according to Sunil Damania, Chief Investment Officer of MojoPMS. "However, elections are not the only factor influencing FIIs to sell in Indian markets. Elevated market valuations and profit-taking after a strong rally also play a role."

Another major trigger for the selloff could also be the outperformance of Chinese stocks, according to VK Vijayakumar, Chief Investment Strategist of Geojit Financial Services. "The Hang Seng index rallied around 20% from April 19 to May 20. This boom in Chinese stacks coupled with low valuations attracted FPIs who sold in expensive India and bought cheap Chinese stocks." The election jitters are secondary, he said.

Following India, FPI outflows were observed in Indonesia, Vietnam, and Thailand. Meanwhile, Taiwan recorded the highest inflows of $6.27 billion among the emerging market countries. Countries like South Korea and Malaysia witnessed inflows during the month.

In the first half of May, foreign investors continued their selling spree in financial and information technology stocks, according to NSDL data. Financial services and information technology stocks witnessed outflows to the tune of Rs 9,687 crore and Rs 5,574 crore from May 1 to May 15, respectively.

There is a high probability of a good market rally in India and FPI flows can reverse, post-election results, Vijayakumar said. "However, sustained FII flows will depend on the US bond yields and the Fed’s rate action."

The sell-off in May follows the Rs 8,671 crore outflow in April. Foreign institutions have been net sellers of Rs 20,762 crore worth of Indian equities so far in 2024, according to data from NSDL.

The selling by overseas investors is in line with India's stock fear gauge, which usually spikes during elections. Since the start of the Lok Sabha election's phase 1, India VIX has surged nearly 72%.

Over time, FPI inflows have had a minimal impact on market returns, largely due to the strength of domestic inflows, Damania said. This observation underscores the diminishing influence of FPI investments on market returns compared to previous periods, he said.