Further ₹1 lakh crore worth FPI outflows possible: PL Capital

PL Capital, formerly Prabhudas Lilladher, said that there could be another ₹1 lakh crore worth selling by foreign portfolio investors. In a study, the domestic brokerage said when India’s market cap was at peak at ₹450 lakh crore, FPIs were holding ₹80 lakh crore worth shares.

Based on previous cycles of 2008 or 2022, FPIs could sell about 1 per cent of India’s total market cap or 5-5.5 per cent of their peak holding. As FPIs have already sold shares worth ₹3 lakh crore so far, their selling could reach ₹4-4.5 lakh crore, it said based on its calculation.

Can domestic institutions counter this selling?

According to PL Capital, inflows through systematic investment plan worth ₹26,000-27,000 crore amount to ₹3.25 lakh crore per annum. With inflows from EPFO (₹25,000-50,000 crore) and LIC (₹50,000-1,00,000 crore), DIIs can easily buy shares worth ₹4.5-6 lakh crore, assuming there is no redemption and continuation of flows, it added.

“So, despite strong domestic demand, global uncertainties like tariff wars, delayed interest rate cut suggest that market consolidation is the most likely scenario, rather than a sustained rally or a sharp correction. Persistent FII outflows and valuation concerns can limit upside gains. Sector rotation is evident, with cyclical stocks likely to outperform defensive stocks in the coming months,” it added.

Nifty 50 is down 12 per cent from its all-time high of 26,277 in September 2024. The correction has come on the back of global uncertainty, weak earnings growth, and high valuations. “Mid and smallcap indices are seeing deeper correction, with Nifty Midcap 150 down about 18 per cent from its 52-week high and Nifty Smallcap 250 down about 23 per cent,” it added.

Despite the correction, mid-cap and small-cap stocks continue to be more expensive than their 5-year averages. The decline in largecap stocks (below their 5-year average P/B) and the higher P/B ratios of mid & smallcaps (above their 5-year averages) suggest a normalisation of valuations, it further said.

According to PL Capital, the big positive was the Union Budget and the negative is ongoing FPI selling.