Institutional investors for any country can be both External Investors (Foreign Investors) and Internal Investors (Domestic Investors). When the Indian Government opened its doors for foreign money into the Indian Stock market, they were named Foreign Institutional Investors (FII), commonly known as FIIs. To further reduce time and rationalise the process, the Indian Government introduced new Foreign Portfolio Investor (FPI) regulations in 2014, which were then implemented by the Securities Exchange Board of India (SEBI). FII can be referred to as a single foreign investor or a group of foreign investors.
FPI invests in securities/stocks in other countries. In India, they can hold up to 10% of the equity in any company. Various entities/organisations can register as an FPI. Most common are foreign Mutual Funds, Pension Funds, banks, asset management companies, insurance companies, governments, and sovereign wealth funds.
Domestic Investors or Domestic Institutional Investors (DII) are investors of the resident country who invests and trade in securities of their home country, e.g., India. Insurance companies, Mutual Funds, banks, financial institutions, provident funds, and pension funds are some of the prominent examples.
Institutional Investors are commonly known as market movers as they invest in huge quantities and volume compared to average retail individual investors. This is reflected in Stock prices as they rise and fall, supported by the momentum. The market reflects when anyone buys or sells shares in large quantities, though the effect might be short-term. The presence of these investors provides the necessary driving force for the market.
Higher inflows of investment into the market by foreign investors show strong sentiment and confidence toward the economy. Increased investment into the Indian market will make the economy and the market more attractive to other investors. Further, a continuous flow of foreign investments helps the economy keep the cash flow positive and balance deficits in the government’s current account. Many traders keenly follow the investment patterns of these investors, as FII have the advantage of timely information and colossal resources, which gives them an upper hand in due diligence compared to the individual retail investors. A higher institutional stake in a company reflects a positive sign.
Companies and individuals have conducted various studies and research on the effect of FII and DII on the stock market in India. These studies were done using historical data and bring forth a trend that is still useful in explaining short and medium-term effects. Market analyst’s study between 2007-2015 shows that Foreign Institutional investments into the Indian capital market have affected the performance of vital indexes like NIFTY and SENSEX. Whenever there was a massive flow of funds through FII investments, the market index’s upward movement was witnessed. On the contrary, when there is a reverse movement of investments through FII, there is a considerable decrease in the market indexes.
During the periods of recession and the pandemic, there was a considerable drop in the inflow of investments through FII. Still, suddenly after the economic instability improved, we witnessed a massive influx of FII capital into our stock market with the effect of reducing interest rates in the developed countries. In recent times, many indications and various analysts have pointed out that FII holding in the Indian market has decreased considerably. But this reduction is overly supported by the inflow from DII through continuous investment channels like SIP inflow, which resulted in mutual funds buying into the Indian equities. This trend has been witnessed since post-2015-2016 but has been steadily increasing from 2018 onwards to date. It has been found that FII has reduced its stake in 90% of Nifty50 companies compared to the DII raising its stake in the Indian capital market to 78% in Nifty50. Similarly, in the Nifty500 index, FII’s investments considerably reduced their holdings to 67%, whereas DII raised their stake to 61% in those companies. You can follow and track the movements of FII and DII via the reports published by SEBI and NSE every day from 7-8 pm. The reports compile facts and figures on buying and selling daily, monthly and yearly, which can help you analyse the trend and patterns of the flow of investments.
In light of the recent repo rate increase by the RBI and increase in bond yield in the US market, FII started redeeming their investments in Indian equity. This resulted in a severe fall in the Index. But on the contrary, DII, through their continuous inflow of money through SIP, started buying into the Indian equities market, which has helped in absorbing the pressure of the exit and improved the sentiment towards the Indian market. A rise in the US interest rates does not augur well for the Indian markets as foreign investors pull out money from emerging and risky markets like India and invest in safe and secure markets in the US like debt funds.
The Indian market is very tempting for FII among all developing economies as India’s capabilities and human resources are the highest. The global market and economic situation have always strongly influenced the Indian capital market. With the immediate effect of the pandemic, there was a massive withdrawal of FII and DII from the equities market. But a revision of government policies and improved sentiments did result in an inflow of investments through FII and DII. In the end, FIIs aren’t going anywhere and will remain the biggest influencer and trendsetter of investment patterns in the Indian equity market in the times to come.
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– Avishek Pyne