India’s stock market experienced a downturn for the fifth consecutive day on Monday despite strong buying by domestic institutional investors (DIIs). While DIIs significantly increased their share market investment, purchasing a provisional ₹13,245.12 crore in shares, foreign institutional investors (FIIs) liquidated substantial positions.
FIIs sold a provisional ₹8,293.41 crore in shares and nearly ₹8,000 crore worth of Nifty and Bank Nifty futures contracts, according to data from the NSE and BSE.
This shift in share market investment patterns has been attributed to FIIs reducing their bullish positions in the futures market. Their sell-off resulted in a notable decline in the Nifty, which fell by 0.87% to close at 24,795.75, dropping below the critical 25,000 mark.
Global tensions weigh on markets
The ongoing sell-off by FIIs is largely driven by international factors. According to Andrew Holland, CEO of Avendus Capital Public Market Alternate Strategies, China’s recent stimulus package led to the liquidation of FII positions in India’s markets.
Additionally, global concerns about a potential conflict between Israel and Iran have contributed to uncertainty. If tensions escalate, oil prices could surge, leading to inflationary pressures that might prompt the Reserve Bank of India (RBI) to adopt a more hawkish monetary policy stance.
The reopening of China's market after a week-long holiday is expected to lead to some redeployment of investments from India to China, adding further complexity to the Indian share market investment landscape. The RBI’s Monetary Policy Committee is scheduled to meet from 7-9 October, a key factor in shaping investor sentiment.
Rising volatility amid market fears
Investor anxiety has been reflected in rising market volatility. On Monday, the India Vix—a measure of market fear—increased by nearly 7%, reaching 15.08. The market downturn was particularly influenced by heavyweights such as HDFC Bank and Reliance Industries, both of which contributed significantly to the Nifty's decline.
As FIIs continued their futures sell-off and reduced their share market investment, domestic investors stepped in to absorb some of the selling pressure. Despite this, market sentiment remained cautious due to external geopolitical and economic factors.
Significant losses in investor wealth
India’s recent market downturn has been costly for investors, with a total of ₹25 trillion in wealth wiped out over just five trading sessions. This sell-off began on 27 September when the Nifty peaked at 26,277.35. Since then, FIIs have not only sold shares but also closed out their long positions in index futures. By Monday, they had entirely liquidated their 82,987 outstanding long positions and initiated short positions on 34,724 contracts.
This significant reduction in FII futures holdings exacerbated the market’s fall, even as DIIs tried to offset the impact by increasing their share market investment. According to Rohit Srivastava, founder of IndiaCharts, FIIs held a large number of long index futures contracts as recently as 23 September, but Monday’s sell-off marked a complete reversal of their strategy.
Broader market impact and future outlook
The recent decline has affected all major indices, with the Nifty now down 5.64% from its record high of 26,277.35. The Nifty Midcap 150 has dropped by 5.56%, while the Nifty Smallcap 250 is down by 6.28% from its peak. These declines are significant, marking a 5-10% pullback across the board. If losses continue, the market could enter correction territory, defined as a fall of 10-20%.
As the global economic and geopolitical environment continues to influence market movements, domestic investors may play an increasingly important role in stabilising the Indian market. Their sustained share market investment could help mitigate further declines, but much will depend on external factors, particularly developments in China and the Middle East.
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