Indian Stock Market’s Shifting Dependency: A Closer Look at FII Flows

Key Takeaways:

1. Significant reduction in FII holding in the Indian stock market, currently at around 15% of the total market cap.
2. Increased domestic flows have contributed to the market reaching an all-time high, despite the low FII holding.
3. Shift in FII flows towards more stable Foreign Direct Investment (FDIs) is expected to bring long-term stability to the market.
4. Anticipations for the coming year include continued foreign flows, driven by the expected reversal of interest rates in the USA, and the importance of robust domestic flows to reduce market volatility.

The dependency of the Indian stock market on Foreign Institutional Investors (FIIs) flows and the recent trends in FII holdings. Let’s break down the key points and analyze the current situation.

Dependency on FII Flows

The passage highlights the historical significance of FII holdings in the Indian stock market. It mentions that the FII holding in the Indian market is currently at around 15% of the total market cap, which is one of the lowest levels in the last 10 years. In contrast, the domestic retail and institutional investors’ holding has increased to around 36% from ~25% in 2012. This indicates a significant shift in the composition of market participants.

Impact of FII Flows

The passage also discusses the impact of FII flows on the Indian market. It mentions that despite the low FII holding, the market is at an all-time high, which is attributed to increased domestic flows. However, it also acknowledges the role of positive FII flows in the upturn of the market and the level of activity in both primary and secondary markets.

Shift in FII Flows

Another important point is the shift in FII flows towards more stable Foreign Direct Investment (FDIs) from the earlier predominantly hot money of portfolio investments. This shift is expected to bring more long-term stability to the market compared to the short-term movements associated with portfolio investments.

Future Expectations

The passage anticipates continued foreign flows in the coming year, citing the expected reversal of interest rates in the USA as a reason for the inflows to continue rising. It also emphasizes the importance of continued robust flows from domestic investors to reduce volatility in the market.

Conclusion

Based on the information provided, it seems that while the Indian stock market has seen a shift in the composition of market participants and a reduction in FII holdings, the market still relies on FII flows to some extent. The recent trend of increased domestic flows and the shift towards more stable FDIs may contribute to reducing the market’s dependency on foreign flows in the long term.

FAQ

Q1: Is the Indian stock market still dependent on foreign flows?

A1: While the market has seen a reduction in FII holdings and an increase in domestic flows, foreign flows still play a significant role in the market’s performance.

Q2: What is the expected trend for FII flows in the coming year?

A2: Anticipations suggest continued foreign flows, driven by the expected reversal of interest rates in the USA, with an emphasis on the importance of robust domestic flows to reduce market volatility.