Market Correction Amid FII Outflows and Weak Earnings: What’s Happening?

The Indian stock markets have been riding a high wave throughout much of 2024, with benchmark indices like the BSE Sensex and NSE Nifty reaching record peaks in September. The Sensex hit an all-time high of 85,978.25, while the Nifty touched 26,277.35. 

However, the euphoria was short-lived as the markets entered a correction phase from October onwards, with both indices plunging over 10% from their peaks. The decline has primarily been driven by heavy selling from Foreign Institutional Investors (FIIs), disappointing corporate earnings, and broader economic concerns.

Massive FII Outflows Spark Sell-Off

One of the biggest contributors to the market downturn has been the significant outflow of funds by FIIs. In October alone, FIIs pulled out a staggering ₹94,000 crore (around USD 11.2 billion), marking the worst month on record for FII outflows. This selling trend has continued into November, signalling sustained bearish sentiment from foreign investors.

The shift in FII flows was partly triggered by an economic stimulus package in China, which attracted global investors seeking better valuations and higher returns. Additionally, elevated valuations in the Indian market made it less attractive, pushing FIIs to seek opportunities elsewhere.

Weak Q2 Earnings Add to Market Woes

The correction has also been amplified by weaker-than-expected earnings in the second quarter of FY25. Corporate earnings growth for Indian companies was muted, with net profits rising by only 3.6%, marking the slowest growth in 17 quarters. Key sectors such as automobiles and FMCG posted disappointing results. The auto sector faced a drop in demand, while the FMCG sector struggled with muted sales, failing to meet expectations of a strong recovery.

This earnings slowdown, coupled with rising expenses and interest costs, has raised concerns about the growth outlook for Indian companies, further dampening market sentiment.

Inflation and Currency Pressures

High inflation has added another layer of pressure on the Indian markets. In September, inflation hit 5.49%, the highest level this year. Rising inflation erodes purchasing power and squeezes consumer spending, affecting corporate profits and investor confidence. Moreover, the heavy FII outflows have led to a depreciation of the Indian rupee as foreign investors convert their holdings back to dollars. A weaker rupee increases the cost of imports, potentially exacerbating inflationary pressures.

Domestic Investors Step In

While the exit of FIIs has created turbulence, Domestic Institutional Investors (DIIs) have been stepping in to support the market. In October, DIIs bought equity worth ₹107,254 crore, providing much-needed liquidity and cushioning the impact of the sell-off. Their buying activity has helped stabilise the market to some extent, but it remains to be seen whether this support can be sustained if FII outflows continue.

What Lies Ahead?

The market’s direction will largely depend on several key factors, including the ongoing FII selling, domestic inflation trends, and global economic developments. The outcome of the US presidential elections, fluctuations in US bond yields, and updates on China’s economic policies will play crucial roles in shaping investor sentiment.

Despite the current correction, the long-term outlook for the Indian market remains positive due to strong domestic demand and favourable structural trends. However, investors should brace for increased volatility and potential downside risks in the short term.

How Should Investors Respond?

During such corrections, investors must remain calm and avoid panic selling. Market downturns often present opportunities to buy quality stocks at lower prices. Systematic Investment Plans (SIPs) can help investors take advantage of rupee-cost averaging during volatile periods. It’s also a good time to focus on fundamentally strong companies with solid growth prospects.

Conclusion

The recent market correction, driven by heavy FII outflows and weak earnings, has created uncertainty among investors. While domestic support has cushioned the blow, global and macroeconomic factors will continue to dictate market trends in the coming months. Investors should stay focused on the long-term growth potential of the Indian market while navigating through the short-term turbulence.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.