In May, Indian equity markets experienced the highest outflows in Asia, with foreign institutional investors (FIIs) withdrawing a staggering $2.89 billion. This marks the most substantial monthly FII outflow since January 2024, reflecting heightened investor caution amidst uncertainty surrounding the general election results.
Despite the outflows, Indian benchmark indices, Sensex and Nifty, posted modest gains of 0.9 percent and 1.25 percent, respectively, so far in May. In contrast, other Asian markets witnessed mixed performances, with Hang Seng surging by 5.8 percent, Kospi by 1.1 percent, Jakarta by 0.3 percent, and Shanghai declining by 2 percent. Meanwhile, Japan’s Topix index and Nikkei advanced by 1 percent and 1.2 percent, respectively.
The trend of FII selling extended beyond India, with significant outflows witnessed in other emerging markets. Indonesia saw $700 million in selling, followed by Vietnam with $415 million, Thailand with around $210 million, and the Philippines with approximately $58 million in equity markets. On the flip side, FIIs were net buyers in Japan, Taiwan, South Korea, and Malaysia’s equity markets, purchasing $7.59 billion, $6.26 billion, $1.44 billion, and $542 million, respectively.
Rajesh Palviya, Senior Vice President of Technical and Derivatives Research at Axis Securities, attributed the FII selling spree to global factors and domestic uncertainties ahead of the general election results. Factors such as indications from the US Federal Reserve of prolonged higher interest rates, the surge in commodities and metals prices, and geopolitical tensions have contributed to investor caution.
However, Palviya believes that FIIs holding cash is likely temporary. Clarity on crucial factors, particularly the election outcome, could prompt FIIs to reinvest in India, especially if there’s a clear majority for the current government.
Recent discussions among US Federal Reserve officials regarding maintaining higher interest rates for an extended period have also influenced investor sentiment. Concerns over inflation and its impact on monetary policy have been amplified, especially following disappointing inflation readings in the first quarter.
Investors are eagerly awaiting US inflation data scheduled for release on Friday. Domestically, attention is focused on key GDP figures for the March quarter, also slated for Friday, along with exit polls preceding the election results on Saturday. The election outcome is scheduled to be announced on June 4, providing further clarity on policy continuity.
Sneha Poddar, Assistant Vice President at Motilal Oswal, highlighted FII anticipation of the election outcome amidst uncertainty. Rumors suggesting potential electoral surprises have prompted cautious selling among investors.
However, Poddar noted a decrease in FII selling intensity in recent sessions, with some even witnessing net buying. With the election outcome expected next week, investors anticipate clarity on policy direction, which could influence FII behavior in the Indian equity markets moving forward.
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