Foreign institutional investors (FIIs), especially US-based funds, are pulling out of Indian markets at the swiftest pace since January 2022, with redemptions accelerating over the past five weeks. According to an analyst note from Elara Securities, India-dedicated foreign fund outflows have reached $575 million, signaling a reversal after strong inflows earlier in 2023. This pullback comes amid intensified FII selling, which some analysts compare to the 2008 financial crisis in terms of selling intensity.
Data shows that in the last five weeks, US-domiciled funds have accounted for nearly 70% of total outflows from India, withdrawing $385 million, while Ireland-based funds pulled out $240 million. Notably, large-cap funds saw $360 million in redemptions, while mid-cap funds faced $215 million in withdrawals. The trend in foreign outflows from Indian markets echoes past patterns that have sometimes signaled weaker market performance, as was observed in similar pullbacks in 2010, 2015, and 2018.
Sectoral and regional overview
While foreign inflows into the US and European markets remain robust, with the US seeing a large inflow of $33.5 billion in recent weeks, India and China are witnessing outflows. China, after attracting $19.2 billion in foreign investments in prior weeks, recorded $2 billion in outflows, primarily from U.S. funds. Japan also saw foreign fund outflows, with U.S. investors pulling $320 million out of a total $720 million withdrawal.
The shift in FII activity is significant, given that India was one of the top-performing emerging markets for foreign investment in 2023. Japan’s funds, while not yet in the red for India, have seen inflows stall since August.
The recent surge in FII selling is among the most intense periods in Indian markets, comparable to the 2008 global financial crisis. Elara Securities’ analysis points to 22 months since 2000 where similar or greater selling pressures were recorded, with May 2004, October 2005, and March 2020 among the most notable instances. Forward returns following such selloffs tend to show positive rebounds, with median 1-month and 3-month returns of +1.8% and +2.4%, respectively. Historically, 60% of these periods have led to positive returns within three months.
However, such intense selling has also been a precursor to the end of bull markets on a few occasions, as seen in January 2000, August 2007, August 2015, and January 2022. Instances of high-volume FII selling have often followed widely watched events, marking crucial lows for the market, according to the data.>
