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Should I Invest based on FII Flows in Indian Equities?

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There has been a lot of media attention on the inflows and outflows of FIIs. These seem to drive some set of investors into buy and sell frenzies. This article evaluates the impact of FII Flows in Indian Equities.

Structure of Capital Markets

Capital markets of any country are the sum total of all buy and sell actions of all its participants. There are 3 broad categories of participants in the markets. 

  • Retail investors
  • Domestic Institutional Investors
  • Foreign Institutional Investors

Foreign Institutional Investors (FIIs) also called Foreign Portfolio Investors (FPIs) form a significant investor category on the Indian markets. FII ownership forms 18.5% of the overall market cap (as of June 2022). Foreign investors’ investment in India is, as a part of their overall Emerging Market (EM) portfolio. 

FII Flows in Indian Equities and other Emerging Markets

Emerging markets are generally developing countries with high growth rates. The growth rates of developed economies is generally subdued due to the nature of their mature economies. They seek and get higher returns from their investments in EMs. BRIC countries – Brazil, Russia, India, China are examples of emerging market economies. 

The FII investment trends depend on a lot of factors, but primarily: 

  • the global economy, 
  • economic outlook of the country of the institutional investor and 
  • economic outlook of the market where the investment is targeted

For instance, FII ownership in the BSE500 index had fallen from near record highs of 21.5% in December 2020 to a decade low of 18.4% by June 2022. 

  • Knowing that majority FIIs investing in India hail from the US, here is a quick macro-economic analysis of why this investment has fallen over the last couple of years by almost 3%:
  • Current global geopolitical issues due to the Russia-Ukraine war has set into motion, a supply crisis from gas to grains. Inflation caused by the war and excess liquidity introduced during the Covid-19 pandemic has made central banks in the West, take a tough stance on rate hikes. 
  • The US and the western economies are reeling under high inflation. The consumer price index (mark of inflation) in the US, is at a high of 9.1, highest since 1981. Fed Chairman Jerome Powell recently made clear that the Fed would continue an aggressive rate hike to reduce inflation. 

Closer Look at FII Flows in Indian Equities

India has been able to mitigate the impact of high inflation, despite crude reaching $120/barrel. GDP numbers for Q1 of FY2023 were promising at 13.5% per the government released data. Economic recovery is looking strong across services and manufacturing. Based on this data, here is a look at how the FII flows have reversed in the last few months as the economic data in India and the overall narrative has reversed. 

Calendar Year 2022Total(INR Crores)
January-28526
February-38068
March-50068
April-22688
May-36518
June-51422
July1971
August56521
September **5066
Total 2022-163732
FII Flows Over 2022

Global Economy Outlook and FII Flows in Indian Equities

The overall global economic slowdown is now on the cards. The US markets have also responded accordingly and there has been a spill over effect on other markets due to this. Quite a few analysts have expressed the opinion that the overall equity returns will be subdued from most major economies till early 2023. Given these conditions, the net FII flows in this calendar year remain negative, though the trend now seems to be reversing. 

The FIIs being such a dominant force on the markets, sway the markets considerably when they invest or exit. An FII sell off can usher in a market correction. But this trend has changed in India, especially post pandemic. The retail participation in the markets has increased significantly. There were close to 1.4 crore new Demat accounts opened just in FY 2021! The retail participation through mutual funds, ULIPs, Hybrid funds, Balanced funds has all added up to approximately $14-15 billion in SIPs annually. These inflows are acting as a cushion against any major FII sell off.

For instance, the DII flows between April 2021 & August 2021 were $7.1 billion. Whereas, FII flows during the same period were just $2.4 billion. During this period, Nifty has gained close to 15%!  In the last 3 decades starting from 1993, FIIs have invested a total of $190.8 billion in the Indian markets. 

FY10-15$114.5 billion
FY16-20$11 billion
FY21$36.1 billion
FY22-$17.1 billion
FY23 (so far)-$6 billion

Conclusion

Despite the dull global outlook, India has stronger growth fundamentals compared to other EMs. The Indian domestic economy has shown strength and resilience. In the long term the Indian economy doing well has high confidence of investors and analysts alike. FII’s have also realized that the growth engine for the rest of this year would be India; till inflation catches up. We will be able to see continued inflows from FIIs in the near future.

Authored by Ram Kalyan Medury, Founder & CEO Jama Wealth. Also published on Financial Express

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