Now FIIs' selling is slowing down. Meanwhile, there is something that Indian investors can catch in this market. With a little help from the Fed, this trend of FIIs' selling can also be reversed.

The biggest problem of the Indian stock market in the last six months is how to stop the selling of foreign institutional investors (FIIs). Even before the month of March started, FIIs had sold more than Rs 3 lakh crore in the Indian stock market in the last five months. The biggest blow of this selling was on the IT and FMCG sectors.

Foreign institutional investors have maintained their selling trend in the first two weeks of March. However, after this, FIIs' selling is now slowing down. Meanwhile, there is something that Indian investors can catch. With a little help from the Fed, this trend of FIIs' selling can also be reversed.

Like last month, the first 15 days of March (ending March 15) saw a sell-off in almost all sectors in the market except the metals sector. The metals sector distinguished itself by attracting an investment of Rs 1,100 crore, making it the only sector to reverse the trend

IT and FMCG saw the biggest sell-off

Sectors most affected by FII selling were IT, FMCG, auto, finance and healthcare services, as FIIs pulled out nearly Rs 19,000 crore ($2.2 billion) from stocks of these sectors. The total outflow from Indian equities during this period was Rs 30,015 crore ($3.5 billion).

IT stocks saw the highest foreign capital outflow of Rs 6,934 crore, which impacted the performance of stocks of these tech companies. For example, the Nifty IT index has fallen by 10% in the last one month.

The selloff in tech stocks can be attributed to the high valuations in the sector, which are hovering at an average of 24 times one-year forward earnings. Fears of a US recession also weighed on sentiment and stocks could remain volatile until macroeconomic conditions stabilise.

When will FIIs start buying?

FIIs have sold the equivalent of Rs 3.4 lakh crore ($28 billion) in the last six months. This is quite unprecedented in recent history. The selloff continued despite domestic policy measures such as income tax cuts by the government and interest rate cuts and liquidity boosting measures by the Reserve Bank.

A rally in Chinese stocks, driven by bets on artificial intelligence breakthroughs, prompted FIIs to exit even faster. Asset managers such as Morgan Stanley and Fidelity International, even though they have an overweight rating on India, have reduced exposure to add bets in China in the last few months.

However, the general sentiment in the market is that selling has slowed down to a large extent. In fact, Indian equities saw buying from foreign investors for the first time in more than a month this week and this continued on other days as well. This has brought down the total withdrawals to around Rs 24,000 crore this month.

Why investors should be hopeful

The performance of the US market remains an important indicator to understand FII investment patterns in emerging markets like India. After the correction phase, we now have reasonable valuations in the market. This along with a weak dollar bodes well for Indian equities.

The US Fed has kept interest rates steady recently, but the outlook is bright with two rate cuts expected this year. Lower US rates make emerging markets like India more attractive to foreign investors due to low treasury yields. The dollar index has peaked and US equities are seeing a slowdown in growth, which will be positive for emerging markets. However, it remains to be seen whether any change in stance will include China as well.