FII Investment in Indian Equities Dips in Early August

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Impact of FII & DII on Indian Stock Markets: August 2023 Analysis

Indian stock markets witnessed a drop in investments from FII in August, with net-selling amounting to Rs 12,826.94 Crores. On the other hand, DII purchased stocks worth Rs 9,872.11 Crores, due to concerns about increasing interest rates in the U.S. and troubles in China's economy. The drop can also be attributed to the Fed minutes which suggested that we might see increasing interest rates in the future.

Foreign institutional investors 

Many foreign groups, like banks, investment funds, and insurance companies from other countries, want to increase their money by investing in projects or companies in fast-growing countries like India.

When a country like India develops, it draws the attention of foreign investors. These investors see more growth potential in developing countries compared to developed ones. Investing in such countries through the stock exchange can offer them higher returns and sometimes tax benefits

Think of FIIs as overseas friends who bring gifts when they visit India. They often give more than local relatives because they can afford it. In return, you offer them a place to stay. This makes them like you more because they get free accommodation.

Domestic Institutional Investors

Indian investors who want to invest in the Indian stock market are called DIIs. They can also put their money in things like insurance companies and mutual funds. Their decisions are shaped by politics and the economy. So, just like foreign investors, these Indian investors can have a big impact on the flow of money in the economy.

Indian investors have a big influence on the Indian stock market, especially when foreign investors are selling more than they're buying.

Impact of FII and DII

FIIs and DIIs make up around 35% of India's stock exchange transactions and have a strong impact on the markets. When they invest in a company, it often boosts confidence among smaller, individual investors. Their investments also boost the country's foreign exchange reserves, helping the government and RBI in their financial activities.

In the past, Indian stock movements were largely influenced by FIIs. Now, with everyday Indian investors actively buying stocks directly or via mutual funds, the dominance of FIIs has diminished. Yet, FIIs retain significant influence; the market often reacts to their substantial trades.

Indian stock markets saw a boom during the Covid period in 2021  but  FII was unenthusiastic during the Covid. they started selling their investments due to which we saw a decline in October 2021 but domestic institutional investors, retailers, and individuals drove the market up during 2021.

Reasons why FII pulled out their money ;

Rising interest rates by the central bank.

Depreciation of the rupee. 

Due to fear of recession.

(Source: Reuters)

MonthsProvisional(in crores)Provisional(in crores)

The Indian stock market is highly volatile and FIIs and DIIs play a meaningful role in the movement of stock indexes. It has been observed that when  Foreign institutional investor buys heavily, the stock market goes up and when they leave, it tends to create major withdrawal effects in the stock market while domestic institutional investors act inversely as we can see in the above table.

  • FIIs provide more liquidity into the stock market than DIIs. 
  • DIIs are more investment-oriented than FIIs.
  •  FIIs are more trading oriented with short-term profit-motive than DIIs.