FII flows: Are we still dependent on FII flows? Paradoxically, we are

While every end of a year is equal to the beginning of another year, the beginning of a year is not necessarily the same as the end of that year. The Indian stock market at the beginning of 2023 was a complete contrast to where it stands now at the end of the year. When we walked into 2023, activities in both the primary and secondary markets were down and out. Most IPOs were pushed out and the secondary market was flittering. At that point, no one could have predicted that the close of the year would see one of the highest market levels with very robust primary markets activities. The number of IPO documents now getting filed each day and the IPOs advertised on the front page of business newspapers are unprecedented.

One of the much talked about interesting trends for the year is a significant reduction in the Foreign Institutional Investors (FIIs) holding in our markets. At present, of the total Indian market cap of US$~4.33trillion, FII holding is US$~656billion or ~15%. This will be one of the lowest FII holdings in our stock markets in the last 10 years plus. To put it in context, in 2012 the FII holding was ~25%. Despite this, our markets are at an all-time high. This is being attributed to another major trend of increased domestic flows. The domestic retail and institutional investors’ holding has moved from ~25% in 2012 to ~36% now. The domestic flows have increased significantly, more specifically through the Mutual Funds route.

With an all-time low FII holding, and an all-time high market, the question that comes up is are we finally decoupled from FIIs flows? Are our markets now no longer dependent on foreign flows? On the face of it, a positive answer sounds apparently logical. However, let us look at some data around this.

The country witnessed significantly lower or negative FII flows in CY2021 and CY2022. In fact, FIIs flows were negative US$ 16.5billion in CY2022. Against this, in the current year we have witnessed US$~20billion of FIIs inflows. This positive FII flow that followed a period of considerably negative flow has played an important role in the upturn of the Sensex and valuations. Without this turn of foreign flows, one would not have witnessed the level of activity presently seen in both the primary and secondary markets.

Further, the foreign flows have started to move more towards the stable Foreign Direct Investment (FDIs) from the earlier predominantly hot money of portfolio investments. This leads to more long-term stability of funds as compared to the portfolio money which can move in and out in the short term as per market returns.

Since FII flows still play an important role in our markets, the question is what to expect from markets in the coming year. As I said, the market at the beginning of the new year is no indicator of where it will end up at the end of 2024. However, standing today, I would believe that the foreign flows will continue. One simple reason is the expected reversal of the interest rates in the USA. Traditionally, our flows are inversely proportionate to the US interest rates. All expectations are that the interest rates will start going down from next year and therefore the inflows will continue to rise. India has been maintaining a premium recipient status of foreign flows – it is one of the main Asian countries to receive FIIs flow. In CY2023, it is the second largest recipient in Asia after Japan. Even amongst emerging markets, it is second only to Brazil. So, overall FIIs flows should be substantially positive.

Of course, we expect to see continued robust flows from the domestic investors which would help reduce volatility in the market, even as foreign flows give the upside. With this we can hope for the good start for 2024 to be positively sustained through the year unless something untoward happens.