The Indian stock market experienced an unusual surge in foreign outflows in October 2024, witnessing FIIs offloading around ₹82,000 crore (or $10 billion) in a single month. This FII exodus, surpassing the previous record set in March 2020 during the COVID-19 pandemic, has shaken investor confidence and prompted a deep dive into the factors driving this shift. Here’s a closer look at what led to this significant sell-off and what it means for Indian markets.

Why the October 2024 FII Sell-Off?

While multiple factors can drive investor behavior, analysts have pinpointed four primary reasons contributing to the October sell-off:

1. High Valuations in Indian Markets

• Price-to-Earnings (P/E) Ratio: The Nifty 50’s P/E ratio has climbed to around 23x, which, compared to historical averages, suggests that Indian stocks may be overpriced. This higher valuation makes the market less attractive to foreign investors who seek higher returns for lower costs.
• Comparative Valuations: Emerging markets like China offer much cheaper stocks, presenting potentially higher returns for foreign investors. For instance, while India’s P/E stands at 23x, other markets such as China trade at significantly lower ratios.

Market	P/E Ratio
India (Nifty)	23x
China (Shanghai Composite)	~12x

2. Shift in Focus to Chinese Markets

• Stimulus-Driven Growth: China has recently implemented substantial stimulus measures to revive its economy, making it more attractive to global investors. This “Sell India – Buy China” shift has led to a substantial flow of funds away from Indian markets toward Chinese assets.
• Valuation Advantage: With China’s economic policies supporting growth, sectors like technology and manufacturing in China have become attractive for foreign investors, intensifying the shift from India.

3. Global Economic Factors

• US Treasury Yields: The yield on the 10-year US Treasury bond has increased from around 3.6% to 4.2%. As bond yields rise, the opportunity cost of investing in equities grows, prompting investors to prefer lower-risk bonds over stocks.
• Interest Rate Policy Uncertainty: While the US Federal Reserve cut rates by 0.5%, expectations about future rate cuts are uncertain. If the rate cut cycle is not as deep as anticipated, it may lead investors to allocate funds away from riskier markets like India.

4. Weak Corporate Earnings in Key Sectors

• Lowered Growth Expectations: Sectors such as Consumer Finance and Energy reported weaker-than-expected earnings, leading to dampened investor sentiment. Several brokerages have also reduced their earnings growth estimates for Nifty from 10% to 4-7%, a multi-year low.
• Impact on Market Indices: The BSE 500, tracking the performance of top Indian companies, has fallen approximately 7% from its peak, with Consumer Finance, FMCG, and Energy sectors hit the hardest.

Sector	FII Selling Impact
Consumer Finance	High
FMCG	Significant
Energy	Moderate

How Are Domestic Investors Responding?

Despite the heavy FII selling, the Indian market has remained relatively stable due to strong domestic inflows:

• Domestic Institutional Investors (DIIs): In October 2024, DIIs bought equities worth ₹83,000 crore, offsetting the FII outflow. DIIs include mutual funds, insurance companies, and pension funds, which continue to show strong buying interest.
• Retail Investors: Retail investors, who invest via systematic investment plans (SIPs), have helped maintain liquidity and stability in the market. SIPs have continued to average ₹22,321 crore monthly, indicating sustained confidence in India’s long-term potential.

SIP and DII Support for Market Stability

Investor Type	October 2024 Net Investment (₹ Crore)
FIIs	-82,000
DIIs	83,000
SIPs (Retail)	+22,321 (monthly average)

Government Initiatives Bolstering Investor Sentiment

Government-backed initiatives, such as the Production Linked Incentive (PLI) Scheme, aim to boost manufacturing and infrastructure, creating long-term growth potential for India’s economy. These initiatives are expected to attract investment back to Indian markets, especially once global uncertainties stabilize.

Historical Perspective: Indian Markets Rebound After Sell-Offs

Historically, the Indian stock market has demonstrated resilience following large FII sell-offs. For example:

1. Post-Global Financial Crisis (2008): After a sharp decline, the market rebounded over 127% within a year.
2. COVID-19 Pandemic (2020): The market fell drastically but recovered swiftly, rallying to pre-pandemic levels in record time.

What Does This Mean for Investors?

While short-term volatility is likely to persist, long-term investors may find this correction an opportunity to buy quality stocks at attractive valuations. Here’s what to consider:

1. Diversification

• With global shifts in FII investment, a diversified portfolio can help mitigate risks associated with any one market.

2. Sector Selection

• Sectors like Technology, Infrastructure, and Financials, backed by government initiatives, may offer promising returns once stability is regained.

3. Systematic Investments

• Continuing SIPs can allow investors to average out their investment costs during volatile times, taking advantage of both market highs and lows.

Outlook

The October 2024 FII sell-off is substantial, but it is not an isolated event. Many factors have contributed to the current market situation, including high valuations, China’s economic resurgence, global economic shifts, and weak earnings. However, the consistent support from domestic investors and retail participation indicates a strong foundation for the Indian market.

Long-term growth prospects remain promising, driven by supportive government policies, a burgeoning middle class, and a robust domestic economy. For now, it’s essential to be cautious yet opportunistic, leveraging systematic investments and sectoral bets that align with India’s growth story.

Market this week

	21ST Oct 2024 (Open)	25th Oct 2024 (Close)	%Change
Nifty 50	₹ 24,956	₹ 24,181	-3.1%
Sensex	₹ 81,770	₹ 79,402	-2.9%

Source: BSE and NSE

• Market extended its losing streak for the third consecutive week, driven by muted Q2 earnings expectations, continuous FII outflows, and ongoing Middle East tensions.
• The Nifty Auto sector experienced the largest decline, slipping nearly 5% over the week.
• The Nifty Metal index dropped by 2%, reflecting weaker performance.
• Nifty Media, FMCG, and Oil & Gas sectors each shed 1.5%, contributing to the overall market weakness.
• In contrast, the Nifty Bank index rose by nearly 2%, leading the market in gains.
• The Nifty PSU Bank index added 1%, while the Nifty Realty index recorded a modest gain of 0.6%.
• FIIs sold equities worth ₹21,823.34 crore during the week.
• DIIs bought equities worth ₹16,384 crore, helping cushion the market decline.
• For the month so far, FIIs sold ₹80,217.90 crore in equities, while DIIs purchased ₹74,176.20 crore.

Weekly Leaderboard

NSE Top Gainers			NSE Top Losers
Stock		Change (%)	Stock		Change (%)
HDFC Bank	▲	3.66 %	IndusInd Bank	▼	(22.26) %
Tech Mahindra	▲	1.69 %	TATA Consumer	▼	(10.99) %
Bajaj Auto	▲	1.41 %	BPCL	▼	(10.57) %
Bajaj Finance	▲	0.15 %	Adani Enterprises	▼	(10.28) %
			Hindalco Inds	▼	(9.92) %

Source: BSE

Stocks that made the news this week:

• Cyient shares surged 7% on October 25 after reporting sequential growth in net profit and revenue for the September quarter. At 12:32 PM, the stock was trading 3% higher at Rs 1,830, though it remains down over 20% year-to-date, underperforming the Nifty 50’s 11% gain. For Q2, Cyient’s net profit rose 24% QoQ to Rs 179 crore, and revenue increased 10% QoQ to Rs 1,849 crore, with the Digital, Engineering & Technology (DET) segment EBIT margin improving by 75 basis points QoQ, boosted by aerospace and connectivity growth.
• DCB Bank surged 10% to Rs 121 on October 25, following a robust Q2 FY25 earnings report. The bank reported a 22.6% YoY rise in net profit to Rs 155.5 crore, while net interest income grew 7% YoY to Rs 509.2 crore. Asset quality showed improvement, with NNPA slightly improving to 1.17% in Q2 FY25 from 1.18% in the previous quarter, and GNPA declining to 3.29% from 3.33%.
• Colgate-Palmolive India shares fell nearly 5% on October 25 following its Q2 earnings report. The FMCG major posted a net profit of Rs 395.05 crore, up 16.2% YoY, supported by broad-based portfolio growth. Revenue rose 10.04% to Rs 1,609.21 crore for the quarter, up from Rs 1,462.38 crore in the same period last year.