FII's and Indian market: Analysis

FII's and Indian market: Analysis

Last updated: 17 Aug, 2020 | 03:08 pm

FII's and Indian market: Analysis
  • FII’s have turned net investors in India’s debt market in August, after a long gap of 5 months. FII’s have put in about ₹896 crore so far in the month (as of August 17th 2020).
  • After record FII outflows in March amid the Covid-19 induced market crash, FII equity investments in the following three months have had positive flows. This support from FII’s has helped the Indian equity market to stage a rapid comeback
  • The flows have been even better this month, with FII’s investing ₹26,147 crores so far into equities in August, the highest monthly inflow in FY21.

How much influence do FII’s have in the Indian economy/ market?

  • FII investment flows are a major factor in driving the direction of financial markets in India. Given the velocity of their inflow and outflow, they play a major role in short term market movements.
  • FIIs continue to remain the biggest owners of Indian stocks, after promoters. FII’s own 42.50% of the free-float market cap of the stocks listed on NSE (as of March 31, 2020). Tweet it! In terms of total mcap, FII's own 20.80% (chart below)
  • In case of Nifty 50, FII’s own 26.3% of the holding on a total mcap basis. (view chart)

Why are FII’s pouring in money into the markets despite a gloomy economy?

  • Liquidity- The US Fed has so far poured in over $3 tn in aid to various facets of the US economy. This includes direct cash to citizens, direct loans to companies, and purchasing of all kinds of bonds.
  • This flood of money into the economy causes asset prices to rise- Hence you see US markets at all-time highs.
  • Spillovers of these stimulus funds are finding their way to global markets. “Within the emerging market ETF allocation, India currently finds about a 8.8% allocation of funds against HK/ China(mainland) of over 40%” 
  • Investors are increasing their stakes in already strong and stable blue chip companies which are market leaders. These firms have reported better than expected q1 results, and are expected to gain greater market share following the current turbulence

INDMoney View

  • An influx of liquidity in the global markets has caused a sharp rebound rally from the March lows. The US Fed, RBI, and a lot of other central banks around the world have pumped money into the system. With unattractive interest rates, excess liquidity and savings are often pumped into the stock market.
  • Debt mutual funds--especially credit risk funds-- have seen severe liquidity and redemption pressure in the current stressed scenario. From a high of nearly Rs 80,000 crore that credit risk funds managed in April-19, the total amount managed has fallen to below ₹29,000 crore as of 11th August 2020, according to data from AMFI. The Franklin Templeton fiasco in April exacerbated the redemptions.
  • Both equity and debt markets are expected to remain volatile in the medium term
  • Invest in equities in a staggered manner. Keep your SIP’s running. Stick to large caps and index stocks that are best suited to navigate the economic crisis
  • Stick to high-quality AAA-rated low duration funds and bonds. Prefer safety over high yields in this volatile market.