Persistent FII selling in Indian equities and a shift in focus to other emerging markets like Korea and Taiwan have created a raging debate amongst domestic investors and financial media. Are FIIs getting easy exits because of strong domestic buying?
This seems more like a narrative that has been floated. It implies that if Indian monies were scarce, FIIs would have been forced to hold on and could not have sold. But, history has been very different. FII money has always been opportunistic capital. In the past, FIIs have sold even at absurdly low valuations when it made no sense to sell. Most multibagger returns came from mid-cap and small-cap stocks that FIIs were desperate to sell. Domestic investors were able to create multibaggers because of the valuations at which these stocks were dumped. If FIIs were mindful of valuations while selling, returns in these categories would have been far more sobering. So, blindly taking FII decision-making as superior investment judgment does not make sense.
In the current scenario, FIIs are selling our blue-chip companies even when their valuations are at multi-year lows. Obviously, foreign capital is chasing returns elsewhere, and their Indian portfolios are providing liquidity.
This need not mean that domestic investors are giving easy exits. What this truly means is that our market depth is improving, building resilience and increasing domestic ownership of Indian equities. In the long run, domestic shareholders could become bigger drivers of sentiment and a stronger influence on market stability. What we need now to ensure is the structural stability of the market, maintain a constant check on leverage in the market, avoid manipulation of individual stocks, and make ample liquidity available.
While valuations will always be imperfect, ensuring these factors are in control will keep our markets safe and strong for domestic investors. The way we ensure the safety and stability of our markets is the real story of the current FII selling spree. And, the news is not as bad as we make it out to be.
