Could FII selling intensify next week on higher US CPI, risk aversion due to Iran-Israel conflict?

Any significant escalation in tensions could trigger panic selling and volatility in global equity markets. The market will also closely monitor the movement of crude oil prices.

The Indian market could see a decline in the upcoming sessions, driven by heightened FII (Foreign Institutional Investors) selling activity. Foreign investors, unsettled by concerns regarding a potential delay in Fed rate cuts following the high inflation print in March, may continue offloading domestic equities.

Moreover, escalating Iran-Israel tensions in the Middle East add another layer of uncertainty, potentially exacerbating FII apprehensions.

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Foreign portfolio investors (FPIs) started the year on a strong note and have so far extended the buying streak in Indian markets. However, analysts have raised concerns about whether the inflows in equities and debt markets will continue in the near term.

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FPI investment till so far in April stood at Rs 13,347 crores. There is slight deceleration in debt flows which stood at Rs 1,521 crore during the same period.

Foreign institutional investors (FIIs) were net sellers for four out of five sessions in the week gone by, and the net outflow stood at Rs 6,526.71 crore. April 12 witnessed big FPI selling to the tune of Rs 8,027 crores on fears of changes in the India-Mauritius tax treaty.

"This will weigh on FPI inflows in the near term till clarity emerges on details of the new treaty," said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

"Another major concern is the surcharged geopolitical situation in the Middle East with heightened tensions between Iran and Israel. These will keep the markets on tenterhooks in the near term," he added.

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The hotter-than-expected inflation in the US has dashed hopes of three rate hikes by the Fed in 2024. Now, the market is pricing in only two rate cuts, that too, towards the end of the year. Consequently, the 10-year bond yield has spiked to 4.52 percent, triggering more FPI outflows from EMs like India.

According to Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services, the rise in bond yields due to hotter-than-expected US inflation and amendment in the India-Mauritius tax treaty likely to impact FII flow, dampen the sentiments.

Any significant escalation in tensions could trigger panic selling and volatility in global equity markets. The market will also closely monitor the movement of crude oil prices, global economic data including China's economic growth rate, US retail sales, US Manufacturing Production Index, US Initial Jobless Claims and quarterly results.

Also Read | Israel-Iran tensions: How should investors navigate the impact on financial market?

FII inflows are expected in the bond market. "However, inflows in equities can vary significantly depending on global market conditions. Global flows have become increasingly passive and thus are more dependent on global market cycles," Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS told Moneycontrol

If global market cycles remain favourable then India will benefit disproportionately as India's weight in global indices continues to rise. "However, if global markets are not favourable because of geopolitical conditions or higher inflationary pressures then even India may not see the inflows expected on account of favourable election results," Kulkarni said.

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