What exactly driven the record FII selling in the Indian markets in the month of March 2020?

In March 2020, FPIs sold a record Rs.124,000 crore in the equity and debt combined. This included Rs.65,000 crore of selling in equities and Rs.59,000 crore of selling in debt. This is the largest monthly selling by FPIs since they were first allowed into India in the year 1992. There were 3 principal reasons for the heavy FPI selling in March 2020.

· COVID-19 lockdown resulted in FPIs turning risk-off. Lockdown means that the GDP growth will slow down and consumer power will be under stress. It also implies that we could be in for consumer loan defaults. FPIs don’t relish that idea.

· The banks, NBFCs and MFIs are under stress. Financials matter to the markets due to their 41% weightage in the Nifty. FPIs have begun to rethink their banking exposure in India. FPIs expect weak growth to drive valuations of financials lower.

· MSCI deferment of the weight upgrade also disappointed FPIs. MSCI was supposed to upgrade India weightage by 100 bps. The decision to put off the upgrade puts FPIs in a spot and forced selling by ETFs. MSCI was worried about impact dilution.