The holding of foreign investors in the Nifty-500 index has been on a consistent decline. In the December quarter, the stake of FIIs in the Nifty-500 fell to a six-quarter low of 20.9 percent, brokerage house Motilal Oswal stated in a recent report. This has been the fourth consecutive quarter of decline.
In the September 2021 quarter, this figure stood at 21.5 percent.
Just in the December quarter, the FIIs withdrew around $5 billion from Indian equities on the back of rich valuation, US Fed signaling rate high and rise in bond yields.
The majority of the selling by FIIs in the December quarter was seen in the private banks, with their holdings falling to 20.1 percent in the December quarter from 21.3 percent in the previous quarter, the report noted.
On the flip side, the highest buying by foreign investors was seen in the IT sector with their holding rising to 14.7 percent in the December quarter from 13.4 percent in the September quarter and 12.6 percent in the December 2020 quarter, added MOSL.
Other than private banks, the report mentioned that FIIs also reduced their stake in NBFCs, Consumer, oil and gas, insurance and cement. NBFCs saw a 60 bps decline QoQ while stake in consumer stocks fell by 30 bps.
Meanwhile, apart from IT, FIIs remained net buyers in Autos, Cap Goods, Healthcare, and Utilities, raising stake by 30 bps, 30 bps, 20 bps, and 20 bps, respectively.
Who are foreign investors and how do they affect market movement?
Foreign investors are basically investors or companies that invest in Indian markets but are not based in India. These can include investment banks, hedge funds, mutual funds, etc. The relationship between FIIs and market movement is pretty direct. Usually, when foreign investors are buying and pouring money into Indian equities, it improves the market sentiment leading to a rise in the Indian indices.
Similarly, when due to various reasons, if the foreign investors decide to withdraw money from Indian equities to book profits or to invest in other assets, the markets usually witness a co-relating decline.
Why are they selling Indian equities?
Recently, foreign investors have turned net sellers for four consecutive months including January 2022. Just in January 2022, they have withdrawn ₹28,526 crore from Indian equities.
This mainly comes on the back of the US Fed signaling a rate hike to tighten liquidity, rise in inflation, and the strengthening of the dollar.
While interest rates are at an all-time low in India, the rise in inflation especially due to the surge in crude oil prices as well as an indication from US Fed for a rate hike may lead to the same in India which will mean less liquidity for the foreign investors. This has prompted foreign investors to pull money out of riskier assets like emerging markets and invest in more stable assets.
Also, when inflation rises, so do interest rates leading to a decline in company profits. As a result, investors will not want to buy Indian stocks at a high valuation if the same is not reflected in companies' earnings.
Currently, FIIs are bearish on financials because of rate hike concerns, especially on the back of rising inflation. However, they expect IT stocks to continue performing well and sustaining their earning growth, so they are investing heavily in them.
While foreign investors were sellers, domestic institutional investors turned buyers supporting the Indian indices. DIIs bought Indian equities worth over $8 billion in the December quarter, taking their overall holding in Nifty-500 companies to 14 percent.
DIIs increased their stake in 53 percent of the Nifty 500 stocks and in 70 percent of the Nifty50 stocks.
As per the note, In Q3FY22, DIIs increased their weights in IT (+120 bps), Cap Goods (+40 bps), and Autos (+40 bps) the most. Conversely, they decreased their weights in Consumer (-60 bps), NBFCs (-50 bps), oil and gas (-30 bps), and Utilities (-30 bps) QoQ.