COVID-19 has taken a toll on the economy by disrupting all the activity and by completely wrecking the production and supply chain. This has created a lot of panic in the markets and thereby creating a massive selling pressure in the markets. The reversal in the market not being visible in the near term, the FIIs may continue to offload their holdings until the status quo is established in the markets.
The panic sell-off has led a lot of liquidity outflow from the markets with selling in Debt Instruments. Institute of International Finance stated that outflows from emerging debt market in March stood at $31 billion, highest since the global financial crisis in October 2008. Nearly, Rs. 48,710 crores were moved out of markets in 2019-20 to the Coronavirus outbreak and global recessionary pressures. Sell off in debt markets have been basically due to redemption pressures from offshore funds. This has been a major reason for outflow in the markets.
March 2019 saw an outflow of nearly Rs. 65,000 crore being highest in this calendar year, however, the month of April saw reduced selling in equity which was nearly at Rs. 5,000 crores. With extended Lockdown till May 17, the situation has turned dicey, however partial relaxation for lockdown, in less affected areas, may stimulate the economy but still, the markets may ride on choppy waters for foreseeable future. Till now, May has seen, nearly Rs. 15,000 crore worth net purchases by FIIs in all segments. This has been so because of some green shoots in the markets and if the situation deteriorates any further, we can see sell-off again because FIIs would like to reduce their exposure in such eventuality.
Investors should be careful and watchful of another possible sell-off because if there is an increase in COVID-19 cases, the markets will respond accordingly and FIIs will unload their baggage in order to contain their exposure. However, due to the relief package announced by the government, there seem to be positive sentiments trying to spring up. If this situation persists, there are chances of fresh long positions by FIIs and DIIs otherwise a number of COVID-19 cases may be a lead factor in determining the actions of FIIs and DIIs.