FIIs and the Indian equity market

FIIs and the Indian equity market

A year after the economic crisis of 1991, Foreign Institutional Investors (FIIs) were first allowed in Indian markets in September 1992. In the initial 4-5 years, the FIIs were investing in the equity segment alone, and it was from 1996-97 onwards that FIIs started investing in the debt market.

The two reasons why FIIs cash inflow happens is when the existing money in the global market is guided to our markets as they see a better growth opportunity or it can be preceded by enormous liquidity available in the market due to the change in fed policy or stimulus from developed economies. In 1998 -99 for the first time, we had a negative flow in FIIs, due to the Asian currency crisis. A net outflow of 1,584 crore rupee from our capital market caused the Nifty 50 index to form bearish candles from May 1998 as it crashed 35% to 800 in December from its high of 1,247 in April 1998. Though by March of 1999 it made up to 1078 by recovering 60%.

In the following year, the markets witnessed an unprecedented cash flow of 10,112 crore rupees out of which 9,670cr flowed to the equity market. By the end of the FY 2000, the market had rallied to new highs of 1818. Post the Asian currency crisis, investors looked to outside the Asian Tiger countries of Hong Kong, Singapore, South Korea, and Taiwan and this highly favored India as it was an emerging economy.

After surviving the dotcom burst India had seen another massive FIIs cash inflow in the succeeding years which remained consistent from 2003-04 to 2007-08 on the back of better governance by the first UPA government lead by Dr. Manmohan Singh. Nifty too witnessed yet another steady rally from the low of 930 in May 2003 to a new high of 6,357 by Jan 2008. Throughout these years the FIIs inflow remained positive with a maximum of 66,179 in 2007-08 and a minimum of 30,840 in 2006-07.

On account of the Lehman crisis in 2008-09, there was a U-turn in the markets and it became a negative year for the equity market with a net outflow of 45,811crore rupees though the debt market remained positive. Nifty crashed to a low of 2,252 by October 2008 before it started the next rally in March 2009 again supported by a strong cash flow from FIIs of about 142658 crore rupees on account of the global liquidity through the international stimulus packages. The following years had remarkable FIIs inflow along with which the index rallied. The term of 2010 Oct to 2012 Feb Nifty had shown consolidation before the next rally to 9119 in 2015. The Coal scam allegations against the second UPA contributed to the glimmer market. Then it was in 2015-16 where our markets again had a negative cash flow and the index had a correction caused by a weak global scenario. Throughout these years we observed that unprecedented FIIs cash inflow partnering with a rally in index and vice versa.

Even in the month of November 2020 FII fund inflows have subsequently led to a rally in the Indian equity market. While Sensex has gained 4,268 points, Nifty has risen 1217 points in just 15 trading sessions. This time also, as usual, domestic institutional investors (DIIs) have taken contra position of this rally in the market and resorted to profit booking. One of the main factors behind the FIIs inflows is the change in weight of Indian stocks in the MSCI emerging market index which shows India as a better investor destination. It is further supported by the US stated economic positions of the Democratic Party, which suggests that the dollar could weaken in the medium term. Moreover, in response to the economic slowdown on account of COVID-19 infection, governments and central banks of developed countries announced large stimulus amounting to $21 trillion.

In the month of Nov 2020, FIIs have bought Rs 70,844 crore of Indian equities, the highest inflow in a month at least in the last two decades. Thus a heavy FIIs inflow will lead to a prosperous outlook of our economy that’s a great reason for the market rally.

Idea & Concept: Josin Jacob Research Analyst / Faculty
Content Development: Anju Kurian