FIIs sell equity worth ₹8,000 cr post budget; here's why

Post the Budget announcement of tax hikes on capital gains from equity investments and derivative trades, foreign institutional investors (FIIs) are on a selling spree in the Indian markets. FIIs sold over ₹8,106.21 crore worth of shares in the last two consecutive days from July 23-24, 2024.

As per the latest NSDL data, net fund outflows by foreign portfolio investors (FPIs) on Thursday stood at ₹2852.59 crore, as gross sales reached ₹22,539.41 crore, which included equity, debt, debt-VRR and hybrid assets with both primary and secondary markets investment routes.

With high hopes from the budget, these investors in six trading sessions before the Budget presentation had made net investments of over Rs.18,411.64 crore.

Recent NSE data, which shows combined FII/FPI data from the Indian stock exchanges, reveals that on Budget Day (July 23), foreign institutional investors made gross sales of shares worth ₹17,306.08 crore, resulting in a net outflow of ₹2,975.31 crore. This was followed by additional sales of stocks worth ₹5,130.90 crore on the next day.

FII exit remains a concern primarily because combined net outflows in the last two months of June and May stood at a record ₹77,906.47 crore. Despite an impressive performance by the Indian equity market over the last three years, fuelled by strong corporate profit growth and robust inflows from Domestic Institutional Investors (DIIs), Foreign Institutional Investors have consistently been net sellers during this period.

In contrast, Domestic Institutional Investors have acted opposite to FIIs. They were net sellers, offloading stocks worth ₹7,530.08 crore in six consecutive sessions before the Budget, but then made a net purchase of ₹4,556.12 crore in the two days following the Budget. However, these domestic inflows in the last two days have not been sufficient to counterbalance the foreign outflows.

To curb excessive speculation in the derivatives market, the government with the hike in these taxes intends retail investors to shift from short-term speculation to long-term investment. A recent SEBI study revealed that 7 out of 10 intraday traders lost money in the stock market, with the number of intraday traders increasing by 300% between 2019 and 2023.

“It is proposed to increase the rates of STT on the sale of an option in securities from 0.0625% to 0.1% of the option premium, and on the sale of a future in securities from 0.0125% to 0.02% of the price at which such futures are traded,” Finance Minister Nirmala Sitharaman said in her budget speech. “Short-term gains on certain financial assets shall attract a tax rate of 20%, long-term gains on all financial and non-financial assets will attract a tax rate of 12.5%,” she added. The government also increased the exemption limit of capital gains on certain financial assets to ₹ 1.25 lakh per year.

The updated set of increased taxes contributed significantly to a heightened market volatility as indicated by the NSE Volatility Index (India VIX) which stood at 12.75 on the Budget Day, as investors remained cautious about entering the markets, reinforcing a sense of fear and uncertainty. On July 25, it increased by 7.26%, closing at 12.62. A higher VIX indicates greater investor apprehension and market instability, while a lower VIX suggests more market confidence.

Despite current market volatility, the outlook for Indian equities remains optimistic, with domestic investors expected to continue supporting the market. India is poised to be the fastest-growing major economy this year, with a positive GDP outlook for the decade. A strengthened external account, robust credit growth, higher capacity utilisation, and capital expenditures further support this outlook.