Who Is Dominating The Markets?

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  • 06 Nov 2023

Stock markets are a sum total of the actions of all the traders and investors. No matter how big or how small. Any market participant’s buy or sell decision results in an impact on the price of any stock. Therefore, it is crucial to understand which segment of market participants are dominating.

People like you and me, who individually invest in the stock market, all come under the retail category. The investment institutions like mutual funds, pension funds fall under the foreign institutional investors (FII) or domestic institutional investors (DII) category. All three together form a critical part of the markets.

Historically, FIIs have been key participants in the Indian markets. Their moves have often weighed heavily on the direction of the markets. Are they still a dominant force? Let’s take a look.

A glimpse of FII participation in Indian equity markets

Over the years, FIIs have been showing the diversified magnitude and changing trends. The FII flows witnessed a tepid trend from 2000 to 2003, which coincided with the Dotcom bubble.

During the Bull Run from 2004 to 2007, FIIs poured in US$ 46.4 billion into the Indian markets. However, in 2008 the whole world felt the heat of the global financial crisis that originated in the US. And FII investment took a dip.

From 2009 to 2015, we had an excellent period of foreign investor participation. In 2010 alone, FIIs injected US$ 29.3 billion in Indian equities. The reason was Quantitative Easing (QE) adopted by the developed economies. QE in simple terms means - money printing. These central banks printed money and flooded with cheap liquidity. This flood of cheap money found its way into many emerging markets, including India.

The period from 2016 till 2018 of weak FII participation coincided with the US central bank's goal to normalize the monetary policy

Fast Forward To Present

In the last three years till August 2021, FIIs seem to have returned to India. We have attracted nearly US$ 7.4 billion of FII flows in this CYTD. In the last 20 years, there have been only three calendar years when FIIs have pulled out money from India, despite the consistent currency depreciation and worldwide disruptions.

Overall, FII holdings over the last 20 years have increased in India. Nearly 22-23% of BSE-500 is today owned by FIIs, and they have become the second-largest investors after promoters.

Not only that, India has been an outlier amongst the emerging markets for the last three years. Some of the factors attracting FIIs to India are - rising hopes for strong economic recovery and good earnings growth, a weak dollar index, and the government’s stimulus measures.

India – A preferred destination for foreign investors

FII statistics have been proved pivotal in predicting the undercurrent of the market over the years. But in today's market, it is not only FIIs that influence markets. The share of retail, high net worth individuals (HNI), and domestic mutual funds have also increased since the last year.

Before Covid-19, the retail segment was not very dominant. The lockdown has changed the tone of the market because of the proactive and aggressive retail segment participation. In FY21, we have seen approximately 1.4 crore new demat accounts opened. Meanwhile, our monthly SIP run rate of Rs 8000-9000 crores also adds up to US$ 14-15 billion annually which is helping cushion against any major FII pullout.

In fact, DII flows from April 2021 to August 2021 stood at US$ 7.1 billion versus FII flows of US$ 2.4 billion. Note that, during the same period, Sensex and Nifty both have gained nearly 15%! Interestingly, DIIs remained confident and kept pouring even as FIIs pulled out most months this financial year.

DIIs in Driver’s Seat

While FII and DII activity can be an indicator of market activity, one cannot base their investing decisions on whether FIIs or DIIs are buying or not. It is best to go for a bottom-up approach. Investors should place their bets only on companies that have strong fundamentals and are available at reasonable valuations.


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