The verve of institutional flows has transformed distinctly of late, with the domestic institutional investor (DII) flows markedly outpacing foreign institutional investor (FII) flows over the last seven years, Motilal Oswal said in a recent report.
FIIs vs DIIs: Why do domestic and foreign investors in Indian markets act like two sides to a coin?
The total institutional ownership of Indian equities has, however, remained stable at around one-third (~33 percent) over the last five years, it added.
In its latest report, Motilal Oswal delves deep into key trends of DIIs and FIIs flows.
According to MOSL, divergent trends have been detected in FII and DII flows. While a large part of the period under study was dominated by FII flows, they ebbed post-FY15, DII flows accelerated meaningfully, especially mutual fund (MF) inflows, highlighted the brokerage.
The report further noted that DII ownership of Indian Equities increased to 14.2 percent in June 2022 from 10.9 percent in June 2012; while FII ownership diminished to 18.4 percent in June 2022 from 22.5 percent in March 2015.
Over the last 30 years beginning FY93, FIIs have invested $190.8 billion in the Indian Equity markets, the MOSL report said. The six-year period between FY10-15 – was the peak with cumulative FII inflows of $114.5 billion, however, after peaking in FY15, FII inflows tapered off to a cumulative figure of $11 billion over FY16-20, informed MOSL.
Inflows then revived in FY21 at $37.3 billion, post which, FY22 saw the highest ever outflows in a year at $17.1 billion and $8.6 billion outflows in FY23 YTD, noted MOSL.
Notably, FIIs’ trailing 12-month cumulative outflows were at the highest level as of July 2022 at $30.3 billion, way above the outflows of $12.2 billion during the global financial crisis, MOSL pointed out. However, the recent inflows from FIIs in August 2022 have brought down the cumulative outflows to $25.8 billion. FIIs have also surpassed the longest stretch of selling since GFC, over the same period, it added.
Meanwhile, DIIs have invested $90.6 billion in Indian Equity markets Over the last 23 years beginning FY00, as per MOSL. Since FY07, DIIs have invested $88.8 billion in the Indian markets and of this $81.3 billion was invested by mutual funds (MFs) while the remaining was by other domestic funds, it noted.
A large part ($86.7 billion) of the overall DII inflows since FY00 ($90.6 billion) was recorded over the last eight years (FY16-23YTD), MOSL pointed out.
Within DII flows, MF flows picked up significantly in the last eight years and have invested $83 billion in Indian Equity markets, said MOSL.
"Over FY16-23 YTD, total Domestic MF inflows stood at $81.8 billion while FY00-15 cumulatively resulted in an inflow of $1.2 billion. We believe that the beginning of the SIP cult has catalyzed this to a large extent. In fact, FY18-FY20 together accounted for 57 percent of total flows," the MOSL report informed.
Meanwhile, DIIs except MFs have seen seven consecutive years of outflows amounting to $33.3 billion over FY12-19 after six consecutive years of inflows amounting to $27.5 billion over FY06-11. Only in FY16 ex-MFs saw inflows worth $2 billion in the FY12-FY19 period, MOSL stated.
FIIs and DIIs generally have a converse relationship. At times when FIIs sell most, DIIs have been seen buying heavily and vice versa.
In 2022, foreign investors turned net buyers in July for the first time in 2022, after 9 months of continued outflows. They had been net sellers since October last year.
Between October 2021 till June 2022, they sold a massive ₹2.46 lakh crore in the Indian equity markets. Then, they infused ₹5000 crore in July and a little over ₹46,000 crore in August so far amid softening of inflation in the US and the falling dollar index.
However, after the foreign investors started buying, DIIs have sold around ₹4,283 crore in Indian shares in August so far, after buying a net of more than ₹3.67 lakh crore between March 2021 and July 2022.
So far this year, DIIs have bought shares worth nearly ₹2.37 lakh crore, helping partly offset the pain from an exodus by Foreign Institutional Investors (FIIs) as the US Federal Reserve started raising interest rates to cool inflation.
Going ahead, most experts believe that foreign fund inflow is expected to improve in the emerging markets on account of fading concerns of rising inflation and tightening of monetary policy by central banks. Optimism that lower crude oil prices will help dampen inflationary pressure and prompt the Reserve Bank of India (RBI) to go slow in raising interest rates also added to the bullish sentiment, they said.
The near-term trend in capital flows will be influenced mainly by the movement of the dollar, they added.
FIIs and markets
FII flows versus market returns had a strong positive correlation in the past, which has reversed in the last two years. Usually, they are directly proportionate, when FIIs buy, markets rise and vice versa. For example in FY10, the Nifty rose 74 percent YoY while FII inflows stood at $23 billion. Similarly in FY15, Nifty jumped 27 percent and FII inflows stood at $18 billion and in FY16 when FII sold shares worth $2 billion and Nifty lost 9 percent. However, in the past 2 years, Nifty has given positive returns despite continued FII selling. In FY22, Nifty rose 19 percent even as FIIs sold Indian equities worth $17 billion and in FY23 YTD, Nifty has risen 1 percent despite FII outflows worth $9 billion.