Foreign institutional investors (FIIs) have been on a selling spree in the Indian market, pulling out their money for 9 weeks in a row. In fact, this is the 3rd largest selling streak by FIIs since the year 2000. They have withdrawn Rs 39,794.6 crore in this streak.
What does this mean for the Indian markets?
Historically, it has been observed that whenever FIIs have net withdrawn for 5 or more consecutive weeks, the Indian markets tend to fall. Since 2000, there have been 12 instances where FIIs have pulled out money for 5 or more successive weeks. Of these, the Nifty50 index has fallen 9 times, with an average loss of 9.23%.
However, this time around markets have held their ground and fallen only 3% from September 8 to November 03, 2023.
But what drives the FII selling?
The withdrawal from FIIs can be attributed to a rise in the US 10-year Bond Yields. During the Covid-19 pandemic, these bonds yielded less than 1%. But as inflation soared, the Federal Reserve hiked the interest rates, ferreting the bond yields to a record level last seen during the Global Financial crisis in 2008.
How do these US Bond Yields impact the Indian Indices?
For FIIs, bonds are an alternative investment option to lower their risk. As the Fed hikes the interest rates, bond prices decrease and the yields increase. This increase in the bond yields leads FIIs to shift their investing paradigm from equity to debt markets.
Historically, FII selling tends to occur during periods of rising US bond Yields. Quite sporadic, there have been only 3 instances where the selling spree of FIIs continued while US bond yields fell.
The future of this FII selling spree remains uncertain. However, a fortnight ago, the US Fed held onto the interest rates for the second consecutive time. This decision caused the US bond yields to cool off a bit. Furthermore, the Fed’s dovish comments this time cheered the markets as interest rates are expected to sustain at current levels. With inflation slowing down, there could be a cut in the interest rates too. In turn, the bond yields will begin to fall, making FIIs flock back to Indian Markets. Further, the FII withdrawals for the past week have not been as severe as seen in the previous weeks, suggesting that the momentum in FII withdrawals is slowing down.
Empirical data suggests after the end of the FII selling spree, the Nifty50 has on average risen 3.46% in just 1 month and 4.86% in the next 2 months. Furthermore, whenever the index falls 5% or more, the bounce back generally tends to be significantly superior. It remains to be seen how the Nifty50 reacts after the selling streak is broken.
The Nifty50 index has been consolidating around the 19,300-19,500 range since last four trading sessions. The put writers further strengthened their position at the maximum put open interest strike of 19,300 in Nifty. Both the writers fought it out at the 19,400 Strike with call writers marginally ahead of the put writers at the end of today’s close. The option activity at 19,400 Strike will provide cues about Nifty’s Intraday direction on Monday.
Bank Nifty has been consolidating in the 43,400-43,800 range since last five days. A decisive breakout on either side of the range will provide cues about Bank Nifty’s future direction. The maximum put open interest for Bank Nifty, which is placed at 43,500 Strike, will act as a strong support for the Index.
