10-Feb-2025, 02:08 PM
A recent report indicates that Foreign Institutional Investors (FIIs) still hold approximately $800 billion USD in Indian equities, but continued selling poses a risk to market stability. While India’s reliance on FII inflows has decreased due to strong domestic investments, the significant holdings of foreign investors mean that their persistent selling could negatively impact the market.
Key Points from the Report:
FII Holdings: FIIs hold a substantial portion of Indian equities, despite a decrease in recent years.
Decreasing Reliance: India’s dependence on FII inflows has reduced because of strong domestic investments.
Risk of Selling: Continued selling by FIIs could destabilize the market.
Domestic Investment Increase: Domestic mutual funds (MFs) have increased their investments in Indian equities, reaching a 10-year high.
Trends in Foreign Investment:
Decline in Holdings: FII holdings in Indian equities have fallen to 16% in 2024, from a peak of 20% during the FY14-20 period.
Selling Spree: Foreign portfolio investors (FPIs) began 2025 with net sales of ₹4,285 crore in domestic equities during the first three trading days, influenced by a strong dollar, high US bond yields, and caution before the release of corporate third-quarter results.
Muted Activity in 2024: FPI activity in 2024 was subdued, with net inflows of only ₹427 crore, a significant drop from the ₹1.71 lakh crore in 2023.
Factors Influencing FIIs: Concerns over Indian stock valuations, lower-than-expected domestic GDP growth, weak corporate earnings, and higher US bond yields contributed to this shift.
Shifting Focus: Foreign investors have been net sellers of Indian equities for the past four months, shifting their focus from Indian and emerging market stocks to U.S. equities due to a perceived safer return in U.S. markets.
Profit Booking: Some foreign portfolio investors are booking profits due to the market’s strong performance over an extended period and high valuations.
Domestic Investor Activity:
Increased Investment: Domestic investors have heavily invested in the Indian market, mitigating what could have been a more severe downturn. Since October, domestic investors have injected approximately $27 billion into Indian equities.
Rise in Domestic Equity Investors: The number of domestic equity investors in India has quadrupled between 2020 and 2024.
Overall Market Perspective:
Cyclical Consolidation: The Indian equity markets are undergoing a cyclical consolidation after four strong years of returns post-Covid, which is viewed as a healthy correction.
Long-Term Potential: Despite near-term challenges, some analysts maintain that the long-term fundamentals of the Indian market remain strong and predict a rebound.
