The recent sell-off in Indian equities, driven by aggressive offloading by Foreign Portfolio Investors (FPIs), has resulted in a substantial loss of investor wealth. Over the past three and a half months, approximately Rs 60 trillion has been wiped out from the market. This downward trend is expected to persist as long as FPIs continue their selling amid an uncertain macroeconomic environment.
Market Dip
Market capitalization and Nifty 50 index see significant drops
On September 27, the total market capitalization of all stocks stood at ₹473.84 trillion, with the Nifty 50 index reaching a record high of 26,277.35. Since then, the benchmark index has corrected by 12%, falling to 23,085.95 as of Monday. This decline has led to a loss of ₹59.61 trillion, bringing the market capitalization down to ₹414.23 trillion.
Market Underperformance
Broader markets also experience downturn
The broader markets, including the Nifty Smallcap 250 and Nifty Midcap 150, have also underperformed, each falling by 13.5% since their highs in late September. This has contributed to the overall drop in market capitalization.
The sell-off is largely attributed to FPIs, who have offloaded secondary shares worth ₹1.85 trillion between October and January 12, amid a weakening rupee and rising crude oil prices, exacerbated by new US sanctions on Russia.
DII Impact
Domestic institutional investors’ role in market downturn
Despite Domestic Institutional Investors (DIIs), particularly mutual funds, buying ₹2.18 trillion worth of shares during the same period, the market has continued to fall. This is because DIIs are buying at lower prices to provide an exit for FPIs.
“Volatility will continue as long as FPIs are selling aggressively,” said Nilesh Shah, managing director at Kotak Mahindra AMC. “Once FPIs stop selling and start buying, the market will resume its upward trend.”
Global Influence
External factors driving market volatility
The weakening rupee, rising crude oil prices due to increasing US bond yields ahead of President-elect Donald Trump’s inauguration, and new sanctions imposed by the outgoing Joe Biden administration on Russian tankers and maritime insurers, are factors that are unlikely to encourage FPI buying.
“Falling rupee and rising crude is a double whammy for Indian equities,” said G. Chokkalingam, founder of Equinomics.
Economic Effects
Impact of US bond yields and rupee depreciation
Since September 27, Brent crude has risen 12%, crossing the $80 per barrel mark. At the same time, the rupee has depreciated by 3.4%, hitting a record low of 86.58 against the dollar on Monday, which reduces FPI returns in dollar terms.
Furthermore, rising US bond yields have sparked a sell-off in emerging market stocks, bonds, and currencies, as global investors flock to the relative safety of US 10-year bonds and the dollar.