The Indian cricket team started the year with a bang, securing a nerve-wracking win over Sri Lanka in the final over. However, the markets got bowled out in the first week of the new year with Nifty50 closing with a cut of 1.36%.
The broader index ended December on a sombre note, losing 3.5%. Foreign Institutional Investors (FII) withdrew every single day last month barring one instance on 6th December, displaying their pessimism.
In fact, the year 2022 saw FIIs pulling out a massive Rs 2.75 lakh crore from the cash market. However, Domestic Institutional Investors (DIIs) balanced it as they stacked in a mammoth Rs. 3.07 lakh crore.
The huge withdrawal from FIIs could be attributed to a rise in the US 10-year bond yields. These bonds yielded less than 1% during the Covid-19 pandemic. As inflation soared, the Fed hiked interest rates, driving the bond yields to a 14-year high at above 4% in October 2022. But how do these US bond yields affect Indian indices?
Bonds are an alternative investment option for FIIs to lower their risk. When the Fed hikes the interest rates, the bond prices go down and the yields begin to rise. An increase in the bond yields would mean FIIs shifting their investing paradigm from equity to debt markets. When the bond yields started to rise in 2022, FIIs withdrew their money from Indian markets. In fact, 2022 witnessed higher cash outflow by FIIs from equities compared to the Global Financial Crisis of 2008.
The following chart shows the US 10-Year Bond Yields, Net Investments of FIIs and Nifty50’s movements since 2020.
AgenciesTaking a closer look at the chart, we can observe that when the US 10-year bond yield began to climb from 1% to 4%, the FIIs' net Investments in equities started to decline while Nifty50 remained volatile.
| Period | FII Net Investments (Rs. In crore) | Nifty Returns (%) | US Bond Yields Range (Low - High) |
| January 20 - March 20 | -48,030 | -29.34% | 0.068 - 1.505 |
| April 20 - March 21 | 2,74,032 | 70.87% | 0.533 - 1.744 |
| April 21 - October 21 | -5,020 | 20.29% | 1.226 - 1.626 |
| November 21 - August 22 | -2,42,330 | -10.60% | 1.456 - 3.017 |
| September 22 - December 22 | 95,919 | 14.60% | 2.658 - 4.052 |
Fed’s December hike rate was already discounted by the bond yields and they remained range bound barely touching the October highs of 4%. With inflation waning, these hikes are expected to ease. In turn, the bond yields will begin to fall, making FIIs flock back to Indian Markets.
Since Calendar Year (CY) 2002, there have been only three instances where FIIs withdrew from the equity markets. In the immediate next CY, FIIs invested aggressively and Nifty50 delivered double-digit returns. 2022 marked the 4th incidence of large cash outflow by FIIs.
| Year | FII Net Investments (Rs. In crore) | Nifty Returns (%) |
| 2008 | -52,987 | -51.79% |
| 2009 | 83,424 | 75.76% |
| 2011 | -2,714 | -24.62% |
| 2012 | 1,28,361 | 27.70% |
| 2018 | -32,628 | 3.15% |
| 2019 | 1,01,121 | 12.02% |
| 2022 | -1,21,439 | 4.33% |
| 2023 | ?? | ?? |
If history repeats itself, we might witness FII inflows with double-digit gains in 2023.
Technical Outlook
Nifty50 remained volatile this week and kept trading below its important psychological level of the 18,000 mark. On the daily chart, the index has breached its smaller degree trend line support which is placed at around 18,050 levels and post that significant selling was witnessed.
If we observe a broader time frame (weekly chart) the front-line index is trading between the 9 & 21 EMA which is placed at 18,070 & 17,826 levels. From the past three weeks, bears are making a strong attempt to drift below 17,800 levels but the 21 EMA is acting as an anchor support for the Index. As in the first week of November 2022, Nifty posted a strong breakout above 17,600 levels and registered a life high at 18,887.60 without any meaningful correction. Presently, the current selloff can be considered a throwback of the bullish pattern.
The validity of the bullish pattern stands above the 17,600 – 17,500 levels. If in case the front-line index closes below these levels, then the gate is wide open till 17,200 – 17,000 levels. On the higher end, resistance can be observed at 18,250 levels. If the Nifty50 breaks those levels, it will trigger a buy signal towards 18,500 levels or even higher.
AgenciesExpectations for the week
The week ahead will be filled with a slew of global economic data. Market participants will closely monitor the US and Chinese inflation figures. Back home, the focus will be on the quarterly results of companies. D-street will be keen to hear about future earnings growth trajectory from the management. Amid a host of important events coming up, investors are advised to remain cautious and prudent with their investing picks.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
As an expert in financial markets and investments, I've closely followed the developments in the global economy and financial landscape. My expertise extends to understanding the intricate dynamics between various asset classes and the impact of macroeconomic factors on investment decisions. I have a comprehensive understanding of market trends, investor sentiments, and the interplay between different financial instruments.
In the provided article, the focus is on the performance of the Indian cricket team and its metaphorical correlation with the financial markets, particularly the Nifty50 index. The article delves into the influence of Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) on the Indian markets, citing specific figures of inflows and outflows. Additionally, the impact of US 10-year bond yields on FIIs' investment decisions in the Indian equity market is thoroughly explained.
Here are the key concepts discussed in the article:
-
Performance of Indian Cricket Team: The article begins by drawing an analogy between the Indian cricket team's performance and the financial markets, creating a unique narrative to engage readers.
-
Market Performance: The Nifty50 index's performance is highlighted, with specific attention to its closing numbers and movements in December and the new year. The broader index's decline in December and the subsequent market cut in the new year are emphasized.
-
FIIs and DIIs Activity: The article discusses the contrasting activities of FIIs and DIIs in the Indian market. FIIs withdrew a substantial amount (Rs 2.75 lakh crore) in 2022, potentially influenced by the rise in US 10-year bond yields. In contrast, DIIs invested heavily (Rs. 3.07 lakh crore), balancing the market dynamics.
-
Impact of US 10-Year Bond Yields: The rise in US 10-year bond yields is identified as a significant factor affecting FIIs' behavior in the Indian market. The article explains that when US bond yields increase due to the Fed's interest rate hikes, FIIs tend to shift from equity to debt markets, leading to cash outflows from Indian equities.
-
Historical Data Comparison: The article provides a historical comparison of FII net investments and Nifty returns in previous years, particularly in 2008, 2009, 2011, 2012, 2018, 2019, and 2022. The analysis suggests that historical patterns might indicate potential FII inflows and double-digit gains in 2023.
-
Technical Outlook: A technical analysis of Nifty50 is presented, highlighting its recent volatility and key support and resistance levels. The article suggests that the current market movement may be a throwback of a bullish pattern, and the resistance and support levels are crucial for predicting future market trends.
-
Expectations for the Week: The article concludes with a brief outlook for the upcoming week, mentioning the importance of global economic data, US and Chinese inflation figures, and domestic quarterly results in shaping investor sentiments. Cautious and prudent investing is recommended given the upcoming events.
In summary, my expertise allows me to thoroughly understand and analyze the complex interconnections within financial markets, providing valuable insights into the factors influencing market movements and investor behavior.
