FII selling continues aggressively because they want to bring market valuations down to attractive levels as quickly as possible. If they do not sell aggressively, DIIs may push valuations higher again. Currently, the Nifty 50 PE has declined to around 19.6, and I believe FIIs may aim to bring it closer to the 19 level.
As per my bottom-out tool explained in my latest YouTube video, the Nifty 50 has not yet formed its bottom. For a proper bottom formation, the dividend yield needs to reach around 1.5, which suggests that further downside in the market is still possible.
Many people believe that FIIs are selling due to war-related concerns, but that is not the case. FIIs have been continuously selling since October 2024, when Nifty 50 valuations were high at a PE of around 25. In last 1.5 years, market did not correct meaningfully because DIIs kept buying aggressively, supported by strong SIP inflows.
It has been more than 1.5 years without a proper correction. The key question is—how long can FIIs keep selling if valuations do not come down? Since DIIs were consistently absorbing the selling, valuations remained elevated. Eventually, FIIs had to increase their selling intensity to bring valuations down sharply.
If FIIs had not acted aggressively, DIIs might have pushed the index higher again, preventing a meaningful correction. Therefore, the current aggressive selling by FIIs is actually helping to normalize valuations. As mentioned earlier, an attractive PE for the Nifty 50 is around 19, and the market may form a bottom near those levels.
FIIs are keen to invest in the Indian market, but high valuations have been a major hurdle.
Since the beginning of this bear phase, I have consistently stated in my YouTube videos that FIIs want Indian market valuations to become attractive. If DIIs do not allow valuations to correct naturally, FIIs are left with only one option—to sell aggressively and force valuations down. That is exactly what we are witnessing now.
If DIIs had allowed the market to correct over the past 10 months instead of keeping near all-time highs @ 26,200 level, we would not have seen such a sharp fall now. A gradual correction below 24,000 earlier could have prevented the current steep decline, as valuations would have adjusted more smoothly over time.
The current market crash has nothing to do with war. In the past, we have even seen war between India and Pakistan, yet the market did not fall significantly during those times.
The real issue is that the market was not allowed to correct over the last 10 months. When valuations remain elevated for a prolonged period, FIIs do not get chance to enter in our market.
Many people wonder why FIIs prefer to invest only at attractive valuations. The reason is simple—investing at lower valuations provides the potential for the highest returns by the end of a bull run.
When you invest at high valuations, the scope for returns becomes limited. This is exactly what we have observed over the past 10 months, where elevated valuations resulted in to no meaningful returns.
This is why FIIs are now selling aggressively—to bring valuations down to more reasonable levels. Once market valuations become attractive again, FIIs are likely to return and start buying strongly.