Domestic institutional investors such as mutual funds have staunched the outflow of liquidity from the stock markets caused by foreign portfolio investors (FPIs) exiting in large numbers.

The massive capital outflow from foreign portfolio investors (FPIs) seen over the past 12 months overshadows the sale during the global financial crisis of 2008, according to a brokerage report.

However, when seen in conjunction with the participation of domestic institutional investors (DIIs), the overall outflow is lower, analysts at ICICI Securities said in a report. FPIs have been on an exit mode since the US Federal Reserve began to tighten its monetary policy by first reducing the pace of its monthly purchases and later aggressively hiking interest rates to check inflation.

The foreign investors have been consistent sellers since October 2021 and their cumulative sales stand at over Rs 2.56 lakh crore till June. Though stocks and the rupee have taken a beating due to the FPI sales, their situation would have been worse had it not been for the support from domestic institutions particularly mutual funds where retail investors continue to repose faith on equities through systematic investment plans (SIPs), experts said.

According to the ICICI Securities note, the FPI sales over the past year is the most since the 2008 global financial crash. The trailing 12-month FPI cumulative sales till June in the secondary market are $53 billion against $28 billion during the financial crisis, according to the provisional data from exchanges.

However, if one were to include the inflows into IPOs over the past one year, the net trailing outflow from FPIs is much less at $32 billion. ICICI Securities said net institutional outflows — FPI flows plus DII flows — are relatively lower at $10.6 billion compared with the outflow of $8.6 billion in 2008.

This has been supported by significant inflows from domestic institutions of $42.5 billion. According to the brokerage, the aggregate FPI equity assets stood at Rs 41.5 trillion as of June 15, 2022, which translates into 17 per cent holding of aggregate listed Indian equities, a fall of 300 basis points from the March 2021 level of 20 per cent.

The outflows have been the most from the financials and IT segments along with FMCG, other services and construction materials. Industries such as metals, power, discretionary consumption and telecom saw modest inflows.

Financial stocks for instance saw outflows of Rs 1,06,700 crore since June last year while it stood at Rs 76,500 crore in the case of IT. The key question now is whether the outflows will lessen particularly as valuations have corrected.

Market circles feel there is unlikely to be any good news on this front till worries over inflation and rising interest rates remain. Some of them are optimistic that the intensity of the sale may decline.

Analysts said the upcoming earnings season will give some direction to the stock markets. The quarterly results season will kick off from July 8 when Tata Consultancy Services (TCS) declares numbers for the quarter ended June 30, 2022.