You cannot have an Aatmanirbhar Bharat with the sway of foreign institutional investors (FIIs) controlling the mood of Indian markets.
Historically, FIIs have been the harbingers of change, with the markets moving up every time they pumped in money and down every time they decided to exit.
But our recent exercise suggests that times are changing for the better, and Indian markets are becoming less dependent on FIIs.
What the numbers say
We conducted a simple exercise to test how Indian markets reacted to the inflow and outflow of investments by FIIs over the years.
First, we determined the number of months with a significant net inflow or outflow of FII investments for three periods: 2007-12, 2013-18, and 2019 to present. Next, we looked at the corresponding Sensex returns of these months to observe how the inflows and outflows impacted the market.
Here's what we found.
FII net inflow
| Period | No. of month with Net inflow | No. of months Sensex gave positive returns | % |
|---|---|---|---|
| 2007-2012 | 47.00 | 32.00 | 68.09 |
| 2013-2018 | 47.00 | 34.00 | 72.34 |
| 2019-present | 31.00 | 24.00 | 77.42 |
| Data as of May 2023 | |||
FII net outflow
| Period | No. of months with net outflow | No. of months Sensex gave negative returns | % |
|---|---|---|---|
| 2007-2012 | 24.00 | 20.00 | 83.33 |
| 2013-2018 | 25.00 | 17.00 | 68.00 |
| 2019-present | 22.00 | 14.00 | 63.64 |
| Data as of May 2023 | |||
As you can see, between 2007-12, Sensex gave a negative return in nearly 83 per cent of the months that witnessed a major outflow. However, the same figure came down to just 63 per cent for the next five years. Not just that, at present, this trend is continuing, and the number is declining.
While it is true that the inflow of FII investment does still invite a rally, the above shows that the markets are far less likely to fall now if FIIs exit.
The rise of the Indian retail investor
So, the obvious question our exercise poses is, what led to this change?
In short, Indian retail investing is on the rise. Compared to global standards, retail investing in India has always been laggard. But retail investing has witnessed unprecedented growth in the latter half of this decade, especially post the pandemic.
In addition, domestic institutional investors and high-net-worth investors have also become more active.
Conclusion
To summarise, unlike the times before, foreign investors leaving is not an omen for a downturn.
However, investors must note that this was merely an exercise to verify a particular trend. You should not base your investment decisions solely on inflows and outflows from foreign investors.
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