Global Funds Offload Nearly Rs 23,000 Crore So Far In May: Factors Behind The Selloff

The decision of the US Federal Reserve to postpone rate cuts until year-end has led market participants to anticipate sustained impacts on foreign inflows into Indian and emerging markets. This expectation was fueled by the escalating yields on US benchmark bonds and ongoing geopolitical tensions.

Experts foresee a scenario where foreign portfolio investors, or FPIs, prioritise dollar acquisitions, dampening inflows. They anticipate a meagre one, or at most two, rate cuts towards the end of the year. "I personally feel there will be one rate cut for the year by the US Fed in September by 25 bps, which is before the US presidential elections," said Kunal Sodhani, vice president at Shinhan Bank. 

"A major trend in the market now is aggressive selling by FIIs. Though DIIs are buying, they are not as aggressive as they were due to some concerns surrounding election results," said K Vijayakumar, chief investment strategist at Geojit Financial Services.

The valuation contrast between Chinese and Hong Kong markets, boasting PEs around 10, and the comparatively pricier Indian market, with double the PE ratio, has been a notable factor, Vijayakumar said.

This discrepancy has led to a trend where foreign institutional investors are inclined to divest as long as the outperformance of the Chinese and Hong Kong markets persists, he added.

FII selling is largely to blame for the decline in frontline financials. "For long-term investors, this is an opportunity to buy high-quality large caps driven down by FII selling. Previous episodes of FII selling turned out to be good buying opportunities,"  Vijayakumar said.

Net investment into equity and equity-linked schemes declined 16% over the previous month to Rs 18,917.1 crore in April, according to data released by the Association of Mutual Funds in India on Thursday.

"With the passage of every election phase, the uncertainty is creeping in and is reflected in the capital market. This has resulted in the benchmark indices shedding the recent gains, having an impact on funds flowing to the Mutual Funds,"  Viraj Gandhi, chief executive officer at SAMCO MF, said.

The decline in inflows can primarily be attributed to the selling activity of foreign portfolio investors, which has led to weakened market sentiment, according to Gandhi.

Moreover, as the election process commenced in mid-April, initial expectations leaned heavily towards a substantial victory margin for the ruling party. "However, with every polling phase, the expectations for the ruling party are becoming flattish," Gandhi added.