Foreign institutional investors (FIIs) in India turned cautious in September ahead of the US presidential election, dumping shares in the worst month for benchmark indexes since May.

FIIs were net sellers of Indian shares worth $731.34 million in September after buying $11.14 billion in the previous four months, highlighting the markets’ increasing dependence on foreign money while domestic institutional investors (DIIs) stay away.

According to analysts, fund managers may guard against expected market volatility, impacting capital flows at least in the near term.

The first debate between incumbent President Donald Trump and Democratic nominee Joe Biden weighed on investor sentiment worldwide on Wednesday, with the two exchanging sharp remarks in their first face-to-face challenge.

However, analysts feel that after initial hiccups, the accommodative stance by global central banks will direct more foreign money into emerging markets, including India.

“The flexible inflation targeting framework unveiled by the US Federal Reserve chair indicates that the accommodative stance of central banks is here to stay for the medium term, which is positive for EM flows and broader markets in India," wrote Vinod Karki and Siddharth Gupta, analysts at ICICI Securities.

Steep valuations and low earnings support are other concerns.

“Going forward, with MSCI India’s valuation premium to emerging markets currently well above historical average, we expect institutional flows to slow down and markets to consolidate near term," said Amish Shah, India equity strategist, BofA Securities.

The rising number of virus cases could also have made fund managers worldwide more cautious about their allocation into equities. “We view the FII sell-off in September as profit-booking as there has been run-up in our markets from April till now without any meaningful correction," Hemang Jani, head equity strategist, broking & distribution, Motilal Oswal Financial Services, said, adding the FII sell-off can also be attributed to the second wave of coronavirus infections across the US, UK, EU and Asia.

According to Jani, a stronger dollar also aided FII selling in EMs.

“The dollar also got stronger and made a high of 74 from 72.7 levels in September, forcing the FIIs to pull out money from India and other EMs," he added. In September, the dollar index gained over 2% after steadily weakening for five months.

DIIs sold shares worth 299.17 crore in September after selling 21,054.66 crore in the previous two months. Mutual fund redemption pressures have been rising while monthly systematic investment plan inflows slow.

“Given peak market valuations, we believe redemption pressure could continue," Shah said.