FII Sell-Off and Declining Market Valuations
October has emerged as a difficult month for Indian markets, with foreign institutional investors (FIIs) withdrawing nearly Rs 82,000 crore from Indian equities. The combination of a surge in initial public offerings (IPOs) and qualified institutional placements (QIPs) is draining liquidity, while a weak earnings season offers little to stabilize the market. The Sensex has dropped by about 5% this month, surpassing the significant 4.58% decline seen in June 2022. Broader market losses have been severe, with the total market capitalization of all BSE-listed stocks falling by Rs 29 lakh crore.
Dr. VK Vijayakumar from Geojit Financial Services commented that although a full-scale crash is unlikely, thanks to strong domestic liquidity, the market is undergoing a correction triggered primarily by persistent foreign institutional investors selling. The outflow from FIIs this month has been the largest single-month withdrawal by foreign investors, significantly higher than during the Covid-19 market downturn.
Challenges from IPOs, Valuations, and Earnings Season
The foreign institutional investors outflow is being attributed to a combination of high market valuations and attractive opportunities in other markets, notably China. Analysts suggest that this trend would have been less severe if Indian stocks were not trading at elevated levels. Adding to the pressure is the muted earnings performance in the second quarter (Q2) of the fiscal year, with key sectors showing little growth. Additionally, large IPOs like Hyundai India’s offering and fund-raising activities through the QIP route are depleting investors’ available capital.
Moreover, external factors such as geopolitical tensions and uncertainty surrounding the upcoming U.S. elections are prompting some investors to hold back on significant moves. Goldman Sachs has downgraded Indian equities from “overweight” to “neutral,” citing high valuations and a less supportive environment as limiting the near-term market upside. InCred Equities has also lowered its Nifty target by 3%, forecasting that the market correction will extend into the December 2024 quarter.
Outlook: Correction or Opportunity?
Despite the downturn, some experts see opportunities amid the ongoing correction. FY25 earnings growth is expected to slow to around 10%, down from 26% in FY24, with Nifty-50 companies’ earnings per share (EPS) projected to grow by only 2% year-on-year in Q2. However, optimism remains for FY26, with a potential earnings rebound that could support a market recovery.
According to Gautam Shah of Goldilocks Premium Research, the current market decline may be overblown, with limited additional downside expected. He sees this as an opportunity for investors rather than a reason to panic. Similarly, fund manager Gurmeet Chadha noted that much of the market correction stems from global factors rather than domestic issues, suggesting a quick rebound is possible. Chadha emphasized that corporate balance sheets are strong, and India’s macroeconomic fundamentals remain sound, offering potential for a swift market recovery once the uncertainty clears.
