Nifty50 hit an all-time high of 25,446 on Monday as India’s booming markets witnessed the fourth straight month of buying by foreign investors. The recent surge is driven by the likelihood that the US Fed will start the rate-cutting cycle tomorrow, September 18. Markets are rising due to expectations that the Fed will cut interest rates by 50 basis points (bps) rather than 25 bps as estimated earlier, which will lead to lower interest rates and boost flows into emerging markets.
Morgan Stanley Composite Index’s (MSCI) gauge of Indian shares is up 24% in 2024, in contrast to a 1.7% drop in a similar gauge for Chinese stocks. This has led to the rising influence of Indian stocks in the MSCI Global Standard Index, also known as the World Index. India currently holds a weightage of around 18%, second only to China, which has a weightage of approximately 25%. This marks a significant increase from levels below 10% at the start of 2021.
This chart of the week takes a look at FII & DII activity in the equity segment on a monthly basis over the past decade. We have compared the investing preferences of Indian and foreign investors and how they have fared over the past decade.
FIIs have almost quadrupled their investments in Indian equities over the past decade
Foreign institutional investors (FIIs) assets under management (AUM) in the equity segment stood at Rs 75.5 lakh crore, up from Rs 19.6 lakh crore at the start of 2015. Between January 2015 and September 2024, FIIs were net buyers in 68 out of 117 months and net sellers in the remaining months. This indicates that FIIs were net buyers in 58% of the total months over the past decade.
Over the past decade, FII's buy/sell decisions overlapped with positive and negative changes in the Nifty50 in 90 of the total 117 months. This implies that they bought whenever the markets rose and sold whenever the markets took a hit, and that too with an accuracy of 77%. This can be an interesting data point for traders and swing investors in their pursuit of timing the markets better. Another reason for this accuracy can be attributed to their higher stake of over 17% in the Indian equity markets. This results in their higher influence in the equity market, with prices moving in the direction they trade.
India following the SIP mantra, DIIs were net buyers in 84% of the total months over the past decade
Domestic institutional investors (DIIs) include entities like mutual funds, pension funds and insurance firms. Over the past decade, DIIs were net buyers in 98 of the total 117 months, while net sellers in the remaining months. On a monthly basis, they were net buyers in the market irrespective of where the market was headed.
Central Depository Services’ annual report highlights rising investor confidence in the Indian equity market. This depository company currently has a market share of 76% as of March ‘24 with 11.6 crore investor accounts. This implies that the company has added new investors at a CAGR of more than 25%. According to data released by the Association of Mutual Funds in India, retail investments via SIPs into mutual funds have increased at a CAGR of 24.1% over the past seven years.
Over the long term, both FIIs and DIIs have gained on their investments, thanks to the economic growth
According to Trendlyne’s Technicals, the broader equity market index, represented by the Nifty 500 index which consists of the top 500 listed Indian firms, has gained 273.8% over the past 10 years.
DIIs, even with their strategy of investing in markets consistently, rather than timing their investments like FIIs do, made outstanding returns. This is because India’s economic growth has consistently outperformed in comparison to its peers post-pandemic, highlighted by the GDP growth rate of 8.2% in FY24.
FIIs, on the other hand, have also gained on their investments significantly over the past years. The payoff has led them to consistently increase India’s weightage in their portfolio in comparison to other emerging market peers like Indonesia, South Korea, Thailand, etc. On top of that, foreign investors have witnessed a better risk-reward environment as the rupee has stabilized in comparison to the US dollar over the past few years.
Stable political environment boosts investor confidence in the Indian equity market
FIIs divested over Rs 30,000 crore in the months before the election in June. However, they have re-entered the markets since then with consistent buying in the following months, as the BJP-led NDA alliance formed a government with Narendra Modi re-elected as Prime Minister for a third term.
In recent years, India has made strides in improving the ease of doing business, with reforms in taxation, labour laws, and corporate governance. This stability has attracted increasing FII inflows, further strengthening the Indian equity market. Initiatives like Make in India, Digital India, and Atmanirbhar Bharat have fueled investments in manufacturing, technology, and innovation, promoting growth and attracting both domestic and foreign investors.
