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We frequently hear various news of Morgan Stanley or Goldman Sachs selling shares in some companies or the names of Indian companies like Motilal Oswal coming up in the bulk purchase data for some stocks. Usually whenever there is any selling by these funds & companies the stock price drops sharply and vice versa. Such examples tell us the importance and power of foreign and domestic institutions in the Indian markets. This article examines whether the market movement can be explained by these investors and the level of effects of FII and DII on stock markets in India. Keep Reading to find out!

Image 1 | Effects of FII's and DII on Stock Markets in India

Who Are FII & DII?

Foreign Institutional Investors (FII) or Foreign Portfolio Investors (FPI) refer to investors from other countries putting money in Indian stock markets. These are in the form of sovereign wealth funds, investment trusts, mutual funds, pension funds apart from banks. Domestic institutional investors (DII) comprise local mutual funds, insurance companies, local pension funds, and banking and financial institutions.

FII’s have been allowed to invest in Indian Stock markets only since Sep 1992. FIIs were allowed to take a position in securities in listed corporations, likewise as within the secondary market. At that point, they were allowed solely to invest up to 5%, up to 24% of the company.

Why are FII & DII Relevant?

Stock markets are primarily driven by institutional money. This is because they invest huge amounts which otherwise are impossible for retail investors. FIIs and DIIs account for the bulk of the liquidity in the market. Tracking their inflows and outflows can help predict broader trends in the market.

Historically, FIIs have had a greater influence on the domestic markets. However, the recent exodus of FIIs has partially been offset by the sustained flow from DIIs.

Importance of FII’s & DII on Indian Markets

FIIs are among the most important sources of liquidity for the Indian markets. FII’s buying into the Indian markets reflects their high confidence and healthy capitalist sentiments for the Indian markets.

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The entry of FIIs in India has brought mixed consequences for our markets. On one hand, they improve the breadth and depth of Indian markets and on the opposite hand, they become a source of speculation.

Domestic institutional investors measure those institutional investors that undertake investment insecurities and alternative money assets of the country they’re based. Institutional investment is outlined to be the investment done by establishments or organizations like banks, insurance corporations, fund homes, etc. Merely expressed, domestic institutional investors use pooled funds to exchange securities and assets of their country.

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Study on the Effects of FII’s and DII on Stock Markets in India 

A lot of study and research is done by companies and individuals on the effects of FII and DII on stock markets in India. Although these studies are done using historical data and the trend might not repeat or continue in the future, these studies are still useful in explaining the medium-term effects.

A study conducted in the Indian stocks for the time period between FY 2007-2015 shows that Foreign Institutional investment has influenced the Indian capital market both in NIFTY and SENSEX. The results of the study show that whenever there is a huge flow of FII there is an increase in the Indian capital market index.

Likewise, whenever there is a low flow of FII there is a decrease in the Indian capital index. So, this is how the FII has an influence on Indian capital markets.

It has also been observed in the study that during the global recession period, there is a decrease in FII flow. After the recession developed countries reduce the interest rate so investors looking for Asian markets to invest in. Therefore after the global recession, there is an increase in FII flow in the Indian capital market.

FII & DII Investment Pattern

FII and DII holding | Effects of FII's and DII on Stock Markets in India

 

It has been broadly observed that FII’s have been reducing their holding in Indian companies. The DII’s supported by digitization and huge investments through SIP are buying more and more into the Indian equities. This trend has been observed from 2015-2020. 

FII - DII ownership ratio | Effects of FII's and DII on Stock Markets in India

DII ownership of Indian equities is rising at a fast pace with consistent and rising SIP investments along with a shift toward financial savings. We can clearly see from the above chart that FII holdings in Indian equities have come down. In addition to that, the DII holdings have moved up through this period of 2015-2020.

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Change in stake | Effects of FII's and DII on Stock Markets in India

From the table above, we can observe that FIIs have reduced ownership in 90% of Nifty50 companies. This is as compared to December 2019 quarter even as DIIs increased their stake in 78% of Nifty50 companies. Similarly, FII ownership in 67% of Nifty500 companies has declined while DIIs have seen ownership rise in 61% of the Nifty500 basket

What do we as Retail Investors Track the FII & DII?

As retail investors, our capabilities are very limited in terms of investing and managing our investments. Generally, retail investors are the ones who suffer the most in the case of stock market corrections. They are also the last to enter the bull cycle and don’t have any clue as to when to exit the markets. DII’s & FII’s are the market makers and a lot of the market movements depend upon their investment behaviour and buying-selling pattern.

So if I tell you that there is an easy way to understand the behaviour & sentiments of the FII’s and DII’s you wouldn’t believe it right? Yes, there is an easy way to predict the trend in the Indian markets by understanding the moves made by FII’s & DII in the Indian markets.

Every day at 7-8 pm SEBI & NSE publishes a data set of the buying and selling data of FII & DII for that particular day, in the same way, we can get access to the monthly data for the same from the NSE websites.

Monthly FII and DII Buying and selling data | Effects of FII's and DII on Stock Markets in India

(Monthly FII & DII buying and selling data for 7 consecutive months in the Indian Markets)

So let’s see a current data set of the FII-DII buying selling and understand how we can use it to our advantage as a retail investor.

The data above is for the current period between October 2021- April 2021. It clearly indicates that FII’s have been net sellers in the Indian markets between this time period. In the same way, DII’s have been buying away the equities and have shown positive sentiments towards the Indian markets.

The support of the DII’s by buying equities and absorbing the selling from the FII’s have resulted in the market moving upwards in the last 6 months.

Nifty Index | Effects of FII's and DII on Stock Markets in India

Conclusion

Foreign Institutional Investment has had a huge influence on the Indian capital market. It is found that there is a positive correlation between DII and Indian major index NIFTY over the past 8 years.

The global financial market has an influence on FII flows and DII flows in the Indian capital market. From the analysis, it is found that during the global recession there were decreases in FII flows and DII flows that made a negative impact on the Sensex and NIFTY.

By identifying government policy revision one can analyse the effect of the impact of government policies on FII flows in the Indian capital market. Despite there being other factors that influence the Indian capital market over the past eight financial years investors are recommended to take FII into consideration.

Research has found that FII has the most influence on the Indian capital market. That’s all for this article on ” Effects of FII and DII on Stock Markets in India “, let us know what you think about this article in the comments below. Happy Investing!