The Nifty index has faced its most challenging pre-Diwali period in a decade, experiencing a decline of nearly 6% till October 25, 2024. Analysts attribute this downturn to weak earnings growth and notable outflows from Foreign Institutional Investors (FIIs). Despite these obstacles, some long-term investors view this decline as a potential buying opportunity.
For new retail investors, the losses as of October 25, 2024, have been particularly concerning, as the Nifty has fallen more than in any pre-Diwali phase since 2014. Specifically, October has seen the Nifty and Sensex decrease by approximately 6% and over 4,800 points, respectively. Historically, only four out of the last ten pre-Diwali months have recorded negative returns, averaging a loss of 0.84%. This year's drop is on track to exceed previous records.
Historical Performance Overview
Pre-Diwali Returns for 10 years for Nifty
| Sr.no | Year | Return |
| 1 | 2014 | 0.0% |
| 2 | 2015 | -4.5% |
| 3 | 2016 | 0.2% |
| 4 | 2017 | 0.0% |
| 5 | 2018 | 2.7% |
| 6 | 2019 | 1.0% |
| 7 | 2020 | 6.8% |
| 8 | 2021 | 1.3% |
| 9 | 2022 | 2.3% |
| 10 | 2023 | -1.4% |
| 11 | 2024 | -5.40% |
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Factors Contributing to the Recent Decline
- FII Position Reductions: Foreign institutional investors have been reducing their holdings, largely due to global economic factors, high valuations, and disappointing quarterly earnings in key sectors such as FMCG and automotive. The increased volatility in the market, indicated by an India VIX of 14.7, suggests heightened instability.
- Macroeconomic Concerns: Rising retail inflation, which reached a yearly high of 5.49% in September, has negatively impacted investor sentiment. Additional challenges include increasing interest rates and the underperformance of major sectors.
- Global Market Dynamics: Uncertainties in the global landscape, including geopolitical tensions and upcoming elections in the United States, are influencing investor behavior across markets.
- Sector-Specific Impacts: Key sectors such as Financials, Autos, Energy, and IT have been significantly affected by FII outflows, making them particularly susceptible to changes in global investment trends.
Domestic Investors’ Role
Amid heavy selling from FIIs, domestic institutional investors (DIIs) have stepped in to provide essential support to the market. This pattern has helped mitigate declines and demonstrate resilience.
Consistent DII Buying: Despite the outflows from FIIs in October, DIIs have been net buyers, demonstrating a trend of consistent investment since the post-COVID recovery. This month, DIIs injected approximately ₹97,090.83 crore into Indian equities, marking the highest monthly inflow of 2024.
Year-to-Date Support: As of October 24, 2024, monthly FII outflows crossed ₹ 1 lakh crore; DII inflows touched ₹97,000 crore. DIIs have invested around a crore into Indian stocks, nearly doubling the total outflows from FIIs for the year. DII inflow as of 24 October 2024 (Yearly ₹437702.69 approximate); on the contrary, FII outflow is (Yearly ₹225274.59 approximate). This significant buying activity has helped stabilize the market amid heightened volatility.
Market Sentiment Ahead of Diwali 2023
In October 2023, FIIs continued their selling trend, offloading approximately ₹10,000 crore in the early part of the month. Despite these outflows, the Nifty Index reached an all-time high in September 2024, indicating that domestic investors may have played a crucial role in stabilizing the market.
In contrast, October 2022 saw FIIs making net purchases of around ₹3,000 crores, reflecting a more optimistic sentiment driven by a favourable economic outlook. The divergence in investor behaviour this year highlights the impact of economic conditions on market dynamics.
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Conclusion
The 2023 Diwali season has illustrated the contrasting behaviours of FIIs and DIIs, emphasizing how external economic factors can influence market conditions. While FIIs have adopted a cautious stance, resulting in significant sell-offs, DIIs have actively supported the market, underscoring their importance during turbulent times.
As the market transitions beyond the festive season, the focus will likely remain on domestic investors, who play a vital role in stabilizing market conditions.
