A wrench has been put into the gears of foreign investment flows into Indian stocks by the Budget 2024. Following the presentation of the Union Budget 2024 on July 23, Foreign Institutional Investors (FIIs), who had been monthly active purchasers for the first time in calendar year 2024 (CY24), began dumping their positions.
By July 22, 2024, the FIIs had acquired shares valued at Rs 25,108.69 crore (net). Nevertheless, data indicates that they net sold shares for Rs 10,711.70 crore over the course of the next three trading days, reducing their net monthly purchases to Rs 14,396.99 crore for the month of July thus far.
In spite of this, July's net inflows for a single month continue to be the largest over the previous 13 months. FIIs have net sold equities worth Rs 1.10 trillion so far in CY24.
Changes in the way capital gains are treated for listed, unlisted, and Compulsory Convertible Debentures (CCDs) are the reason behind their abrupt mood swing in July, according to experts.
"The capital gains tax adjustments have been a double whammy for the FIIs, who also have to deal with changes in the classification of CCDs and a higher securities transaction tax (STT) in the F&O segment. It seems more like a hasty response to the events, in my opinion. The US presidential election, geopolitics, corporate profits growth, and the positions taken by central banks throughout the world will all be major factors in the coming months. Then, they probably will reconsider their position, according to U R Bhat, Director and Co-founder of Alphaniti Fintech.
According to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, their shift in position toward India may put pressure on large-cap stocks, which might lead to a little decline in markets from their present levels.
"FPIs are once more selling, and even if DII purchasing is keeping pace with FPI selling, this might put more pressure on large-cap stocks.Large-cap stocks are properly valued, whereas mid- and small-cap stocks are highly valued. This disparity in valuation persists", V K Vijayakumar is Geojit Financial Services' chief investment strategist.
Additionally, the FIIs have dramatically cut their long positions in index futures in the futures and options (F&O) market. A Nuvama Alternative & Quantitative Research note states that at the beginning of the August series, FIIs net longs were 62,000 contracts, compared to 319,000 long contracts at the beginning of the July series.
However, FIIs have larger long positions in futures for individual stocks. The statement also stated that their open interest in single stock futures was 672,000 contracts as opposed to 610,000 contracts over the same comparable time. According to NSE statistics, until midway through the July series, the FIIs' index futures long-short ratio was about 5:1, meaning that for every short bet, there were 5 long holdings in index futures.
Analysts noted that the ongoing adjusting of rates, holding periods, inflation indexation advantages, etc. does point to policy instability, particularly in view of the statement that the whole Income-Tax Act would be reexamined and redesigned in the upcoming year.
The current equities market surge may come to an end due to the increase in taxes (both on capital gains and derivatives trades). Equity investors may see a period of consolidation in the second half of 2024, as prices will need to cool off in order to align with long-term values, according to Mayank Khemka, Chief Investment Officer for India at Deutsche Bank. Following Budget 2024's changes to the capital gains tax, FII flows slow down.
