Foreign institutional investors, or FIIs, are important to the Indian stock markets. So far, FIIs have invested ₹13, 57,608 crore in the Indian markets, according to stock market depository CDSL.
Naturally, when FIIs sell, Indian markets also lose value. However, Bank of Baroda's research on regression analysis of returns of Sensex on FII equity flows shows R-square of 0.27 with the coefficient for FPI being significant. What does this mean in plain-speak? While FII investment is not the sole factor driving the market, it is important nonetheless.
Over the past 15 years, FIIs' net investment in India was positive 10 times while for five intermittent years, they sold more. Financial Year 2022 is the biggest so far with FIIs selling nearly $16 billion worth of stock. Before this, the highest selling year for FIIs was 2009 (Global Financial Crisis), at $9.8 billion. Barring these two years, FIIs were net sellers in FY16, FY19 and FY20.
They peaked investment in India in FY15 with $45.7 billion, Jahnavi, an economist with Bank of Baroda wrote in a note dated May 9, 2022.
What's the current story?
At the moment, FII selling is at an unprecedented level. However, local institutions including retail public has been lapping up shares. Market experts believe the fall in Indian stock market would have been higher than the present 10% range had domestic investors not bought in the face of FII selling.
Global markets, including the US and other European markets have fallen in the range of 15-30%, already.
Jahnavi said, “In terms of sources of FPI, USA had the largest share (37%) in Mar’22, followed by Mauritius (11%), Singapore (8%), Luxembourg (8%) and UK (3%). With a large share from the USA it can be intuitively seen that any development on the economy as well as policy can have an impact on the flow of FPIs. A strong US economy goes with a conservative monetary stance which involves high interest rates as is the case today.”
With the US Federal Reserve tightening money supply in order to control inflation, FIIs have been exiting global markets and taking money back to the US.