Indian equity markets experienced the highest outflows in Asia so far in May, with foreign institutional investors (FIIs) withdrawing funds to the tune of $2.89 billion. This marks the highest monthly FII outflow since January 2024.

In May so far, Sensex rose by 0.9 percent, and Nifty by 1.25 percent. Across Asia, Hang Seng surged by 5.8 percent, Kospi by 1.1 percent, Jakarta by 0.3 percent, while Shanghai declined by 2 percent. Topix index and Nikkei in Japan advanced by 1 percent and 1.2 percent, respectively.

Apart from India, Indonesia witnessed $700 million in selling, Vietnam $415 million, Thailand around $210 million, and the Philippines around $58 million in equity markets. Among buyers, FIIs purchased $7.59 billion in Japan, $6.26 billion in Taiwan, $1.44 billion in South Korea, and $542 million in Malaysia's equity markets.

Rajesh Palviya, SVP - Technical and Derivatives Research at Axis Securities, noted that FIIs are selling in global markets, with caution in India ahead of the general election results this week. Other factors include the indication from the US Fed of prolonged higher rates, the rise in various asset classes like commodities and metals, and geopolitical tensions.

FIIs are currently holding cash, but Palviya believes this is temporary. Clarity on these factors, especially the election outcome, will likely prompt FIIs to reinvest in India, particularly if there's a clear majority for the current government.

Recently, in FOMC minutes, US Federal Reserve officials discussed maintaining higher interest rates for a longer period at their recent meeting, with some questioning if the policy was restrictive enough to lower inflation to target levels. They acknowledged disappointing inflation readings in the first quarter, indicating it might take longer than expected to reach their 2% target.

Officials also considered holding rates steady longer if inflation doesn't improve or easing policy if labor market conditions worsen unexpectedly. This follows a first-quarter rise in inflation, prompting the Fed to keep rates high for an extended period.

Investors are eagerly anticipating the US inflation data set to be released on Friday. Domestically, they are keeping an eye on key GDP figures for the March quarter, also scheduled for Friday, as well as exit polls for the election results on Saturday, with the election results scheduled to be announced on June 4.

Sneha Poddar, VP at Motilal Oswal, said that FIIs are awaiting the election outcome with uncertainty about the results. Rumors suggest the current government may receive fewer seats than expected, prompting some selling.

However, FII selling intensity has decreased in recent sessions, with some sessions even showing net buying. Clarity is expected next week with the election outcome, providing FIIs with indications on policy continuity, Poddar added.