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From 17,464.75 points at the end of March, the benchmark Nifty 50 index was down by 5 per cent to 16,584.55 points at the end of May. During the same period, the Nifty IT Index declined over 18 per cent to close at 29,679.05 points.
The reason for the sharpest decline in the IT index is not too far to seek. The incessant selling of IT stocks by foreign investors has pummeled the sectoral index to a 6-month low during May.
According to the latest data, foreign portfolio investors (FPIs) have pulled out ₹24,713 crore from the information technology sector in April and May. The sector witnessed the second highest outflow of FPIs funds in the first two months of the current fiscal followed by banking and financial services.
In April, FPIs pulled out ₹8,579 crore from the IT sector. However, their sell-off in the sector nearly doubled to ₹16,134 crore in May.
Reasons for sell-off
Nitin Raheja, Executive Director, Head-Discretionary Equities at Julius Baer attributes two reasons for the intensified FPI sell-off in the IT sector.
“Firstly, they (FPIs) are booking profits in a sector in which they have done really well. The valuation of mid-cap IT companies also had touched stratospheric levels and was ripe for a correction and hence the sell-off. Secondly, the expectation of a recession in the US is leading to fears that the IT spending might see a sharp slowdown impacting the order books of the IT services companies,” Raheja added.
FPIs have been net sellers in Indian equities since October 2021 amid concerns over a host of domestic and global economic challenges. The foreign investors have pulled out ₹2.06-lakh crore from Indian equities between October 2021 and May 2022 after a record net investment of ₹2.74-lakh crore in FY21. They have pulled out ₹13,888 crore between June 1-10.
Major factors at play
VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, attributes the incessant FPI sell-off to three factors including overvaluation of Indian stocks as compared to its emerging market (EM) peers, dollar appreciation against Indian currency and rising bond yields, and finally, profit booking.
The banking and the financial services sector is bearing the maximum brunt of massive FPI outflow. The sector saw an outflow of ₹24,907 crore in April and May. FPIs net investment outflow from the financial sector touched a high of ₹82,398 crore in FY22.
“Financials by virtue of their weight in the indexes has been an over-owned sector and hence has borne the brunt of the sell-off. IT sector, probably the second-largest holding for FPI’s, has also seen a similar sell-off,” Raheja said.
Geojit’s Vijayakumar said FPIs are sitting on profits only in a few markets like India while they are sitting on big losses in China and consider Russia as not investible. “So, they are booking profits in India and segments like IT and financials,” he said.
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