No, FPI selling is not an exodus. But then why is it hurting so bad?

Foreign portfolio investors (FPIs) have net sold shares worth $21 billion over four months through January end, shows data from the National Securities Depository Ltd (NSDL). That’s about 2.7% of their total equity holdings worth $782 billion as of January.

This actual selling accounts for just 14.2% of the $148 billion decline in their assets from a cumulative $930 billion as of September end. The rest is attributable to unrealised losses to their portfolios.

“The figure of actual selling as a proportion of total assets might be insignificant but what’s causing the turbulence is willingness to continue selling at lower levels despite being underweight India,” said Nilesh Shah, managing director at Kotak Mahindra Asset Management Company Ltd.

Shah explained that domestic institutional investors like mutual funds were bidding at lower levels to make FPI exits costly. This has caused the Nifty to fall 12.3% from a record high of 26,277.35 on 27 September to 23,031.4 on Thursday.

Also read | FPIs dumped Indian financial stocks in January. But not all is bad for the sector.

The small- and mid-cap (smid) indices have fallen more than the benchmark, which is typical during a correction, with the small-cap index slipping into bear market territory — a drop of 20% or more from the record high — on Friday.

The Nifty Smallcap index has plunged 22.4% from a record high of 18,688.3 on 24 September to 14,501.65 on Friday. The Nifty Midcap 150 has traded down 18.5% from its all-time high of 22,515.4 on 25 September to 18,346.8 on Friday.

The underperformance of smids to Nifty stocks might also be attributed to the intensified selling by FPIs on these counters post December after they had increased weights of small- and mid-caps at the cost of blue chips.

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FPI aggregate shareholding in Nifty Smallcap 250 rose to 13.25% as of three months ended December from 12.83% in the preceding quarter, according to capital market data provider Prime Database.

Aggregate shareholding in Nifty Midcap 150 increased to 15.31% from 14.86% over the period. However, their ownership in Nifty 50 declined to 22.97% in the December quarter from 23.29% as of September, the data shows.

Also read | Shorts on Nifty, Bank Nifty hit record high. Are FPIs bracing for a market shock?

Any investment in the smid space should be done only for the “long term” and the exercise of “stock picking” should be ideally undertaken through a fund manager, said Swarup Mohanty, vice chairman and chief executive officer of Mirae Asset Investment Managers (India).

Meanwhile, thanks to the selling in large-caps, India’s weight on the MSCI Emerging Market Index slipped from around 20% as of September end to 18.41% at January end, behind China’s 27.52% and Taiwan’s 20.02%, according to MSCI data.

Foreign investors track the MSCI indices to allocate funds to markets across the globe.

Kotak AMC’s Shah said that the market correction was continuing as FPIs were selling at lower levels despite being underweight India. As long as this continued, the markets would remain turbulent, he said.

Those FPIs who weren’t selling have been shorting index futures like Nifty and Bank Nifty to hedge their stock portfolios. NSE data shows that FPI net shorts in index futures were close to record highs of 183,589 contracts on Thursday.

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The FPI selling was led by hedge funds and passive trackers like ETFs or index funds to rebalance their portfolios, according to UR Bhat, co-founder of Alphaniti Fintech.

Kotak AMC’s Shah said the selling has been by led US funds as part of a “Quit EM movement” in favour of US bonds, in turn part of optics to “curry favour” with president Donald Trump.

The domestic institutional investors (DIIs) have absorbed the FPI selling in the secondary market by buying shares worth ₹2.73 trillion in the four months through January, according to BSE data, against the sale of ₹2.38 trillion by foreigners in the cash market during this period.

The value of the FPI open interest or outstanding positions in index futures to hedge their stock market portfolios at the end of January stood at ₹7.4 trillion.

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