Who moved the Indian stock market? Is it the Foreign Portfolio Investors (FIIs) or the Domestic Institutional Investors (DIIs)? Data suggest that the recent rallies in the Nifty 50 to its new high has been propelled by the strong FII money inflows.
Nifty 50 had failed in its several attempts made since September 2021 to breach 18,000. The recent rally from the March low of 16,828 cruising through 19,000 has been triggered by a whopping $10.59 billion foreign money flows into Indian equity since April. During this period, DII investments were just $410 million. For easy comparison we have converted the DII flows into dollar terms for each month by taking the average exchange rate of rupee from Reserve Bank of India.
A study on the historical data since 2007 indicates that it is the FIIs who have always driven the Indian benchmark indices to new highs.
Crisis recoveries
FIIs have been instrumental in lifting Indian markets from the lows after any sharp sell-off triggered by a crisis. Be it the recovery from the March 2020 (Covid) or March 2009 (Great Financial Crisis or GFC) lows, FIIs have pumped in money and helped the markets recover. The FIIs poured a massive $60.31 billion into Indian equities from March 2009 to November 2010 and lifted the Nifty from around 2,500 to 6,300.
Similarly, during the Covid crisis, when the Nifty recovered and surged from around 8,000 (April 2020) to 18,600 (October 2021), the Indian markets saw investments of $38 billion by FIIs .
Infusion by FIIs of excess liquidity, thanks to the quantitative easing by the US Federal Reserve, and a series of rate-cuts preceding these two periods aided funds flow into India. At these two-time frames mentioned above, the DII flows were $5.96 billion (GFC recovery) and $10.4 billion (Covid recovery).
DIIs to the rescue
On the other side, when the FIIs exiting Indian markets causing have caused sharp corrections in the and dragged benchmark indices from their peaks. But during these periods of FII sell-off and market crash, DIIs have pumped in money to cushion the fall.
For instance, during the GFC and Covid times, when the stock markets crashed, the DIIs pumped in about $16 billion and $17 billion, respectively, while FIIs pulled out about $11.5 billion and $6.4 billion into the stock markets. During GFC (January 2008 to October 2008) and Covid (January 2020 to March 2020), the Nifty fell from around 6,300 to 2,250 and from 12,400 to 7,500, respectively. At this time, DIIs bought equities for $16 billion and $17 billion, respectively, while FIIs pulled out about $11.5 billion and $6.4 billion from the Indian stock markets
Similarly, the DIIs pumped in over $14 billion when the Nifty crashed from around 9,000 in March 2015 to 6,800 in February 2016. The FIIs pulled out about $3.6 billion during this period.
The rally in the Indian benchmark indices from 2016 to 2019 is a sole exception to the above trend, where economic reforms such as demonetisation, GST implementation after a stable NDA government was formed in 2014 pushed DIIs to infuse about $37.77 billion, more than triple the FII investments of $10.4 billion and lift Nifty flows from the FIIs into action. From March 2016 to December 2019, Nifty rose from around 7,000 to 12,000. During this period, the DII flows were about $37.77 billion more than triple the FII investments of $10.4 billion flows from the FIIs.
What’s in store?
FII inflows have just begun after pulling out about a total of $23.65 billion in FY22 and FY23. So, if this is the beginning of a long buying cycle by FIIs , the Nifty could probably surge in the coming months.