The Impact of FII Cash Flows on the Indian Stock Market

First of all let’s understand what is FII ?

FII or Foreign institutional investor is an investment fund or individual investor who invests in countries other than he is registered in. It includes investment banks, insurance companies, Large corporates or MNCs, hedge funds, pension funds etc.

FII is a well known term for Indian stock market and it refers to outside or foreign investing in Indian markets. In India limits have been placed on FII investment in any company.

FII Timeline

FIIs have been permitted to enter Indian markets post liberalization on recommendations of Narsimhan committee. As per the reports it was said that India is one of the most potential hubs of investment in the 1992 during liberalization. The major reason was the raw infrasture and high population density along with the tag of a resourceful nation. Hence after liberalization the gates for foreign investments were opened up.At that time the limit was kept at 5% for single holding and 24% for overall holding.

FII were given permission to hold 100% of debt securities in NOV 1996 and in 1997 the limit was raised to 30% from 24% of net FII holding. From 1998 FII investment in government securities and treasuries was made legal.

In 2001 the limit was again raised to 40% from 30%. It was made 49% subsequently in March 2001. Today there have been different sections made for deciding which type of company attracts how much percentage of FII holding.

FII Inflows and Outflows

FII is a very important participant in the Indian stock market. The inflows by FII is a determining factor in any bull rally and the outflows are a sign of weakness and fall in the market.

FII Outflows

If we look at 2020 only, then we can notice how much weightage the FII investment holds. In March during the toughest bloodbath week FII offloaded shares worth 65000 crore Rs. and that caused a panic so hard that NIFTY came down to 7800 from 12000 levels. Also the entire banking sector was 15% down with 8-10% downside in Bank nifty on a single day. The Banknifty was retraced to 24000 from 32000 levels. Hence if the FII takes out their cash from our market it suffers from a tragic blood bath.

FII Inflows

In recent times if we notice the FII inflows on Nov and Dec 2020 alone they amount to somewhere around 110000 crore Rs. till date. Also in NOV 2020 month FII reinvested 65000 crore Rs. which was exactly the same amount withdrawn from March last week. The result of such an inflow is the recent bull run from the previous 2 months.

Getting Markets Aligned

Also the FII have the mighty power to pull back the drowning market. If we look at the market on 21-12-2020, Nifty was 3% down. Also Bank nifty was 4.5% down and no share in Nifty 50 showed green pattern. FII still maintained a buying capacity on that day and on 22-12-2020 the market took a sharp U-turn. The nifty which had gone down to 13100 came back to 13450 levels and bank nifty which went down to 28950 came back to 29700 levels. All this is the result of FII having faith in the potential of Indian markets and their net figure of buying.

FII and DII

FII and DII hold a very special relation in Indian markets. First of all DII are domestic Institutional investors which handles the work of balancing the entire Indian stock market. In most of the cases whenever FII is in Buying position DII is in selling position. Hence FII keeps on buying at intervals and DII keeps on selling at intervals. Both parties gain due to the fluctuations in the market. i.e. If FII performs net buying of 10 Rs than DII will have net selling of 10 Rs. or an amount somewhat in the same range.

When there is a rise in market FII earns due to their buying positions. When there is sell off by FII or when there is some bad news and market falls then DII earns due to its selling positions and vice versa.

FII and DII In Same Zone

When FII and DII are in the selling zone together, there is possibility of a downfall in the market. It is a sign that traders should exit from risky or long positions. On the other hand when both of them are in a buying position then the market will definitely go up. Hence it is advisable to stay away from short selling at such time.

How to Find FII/DII Data ?

At the end of every trading day SEBI gives out the FII and DII data. It is visible on SEBI’s website. One can find the net buying or selling position by both the parties on the site.