Stock market strategies are not a 'one size fits all' game even though retail investors often idolised the investing strategies followed by foreign institutional investors (FIIs). They bought when FIIs bought, they sold when FIIs sold. Such subconscious bias of trusting the wisdom of the western world, especially in matters related to modern economy and financial markets has coloured the mood of the Indian share market for a long time.

For years, even though the influence of FIIs in the Indian equity market kept shrinking, their flows still instilled confidence or fear, merely due to the inherent psychological biases. But that's changing fast. A divergence has emerged recently where FIIs are selling but domestic investors are instead buying.

FIIs have been consistently selling Indian equities since October last year which is rare and was last seen in 2008 when they sold equities worth ₹52,987 crore. But in current calendar year, FII selling is intense as in the first 74 days of this year, they sold equities worth ₹1,11,383 crore, according to NSDL. Despite such heavy selling, the Indian equity market has not ruptured and is mere 9.3% down from its peak of 18,600.

This scenario is contrary to the general perception that Indian markets correct a lot when FIIs sell Indian equities. The resilience in Indian equities hints at the changing texture of share market where the exodus of FIIs is more than counter-balanced by domestic participants.

Changing texture of Indian markets

FII holding in the Indian share market had seen the biggest increase between 2004 and 2015 when their share of the NSE 500 stocks expanded from around 13% to 21%. Since 2015, however, their holding in the top 500 listed stocks has stagnated between 20% and 21%, says Harendra Kumar, managing director of Elara Securities India. In the same duration, retail participation - both direct and through mutual funds - went up and currently stands at 17.3%.

As per Greed and Fear report by Jefferies dated February 10, the overall market ownership of FIIs in BSE 500 stocks is at 7 quarter low. At the end of December quarter 2021, FIIs owned 20.7% of BSE 500.

Promoters' total percentage share increased from mid-40s in early 2000s to a high of late 50s in 2009. It's since declined to 50.6% currently, largely due to fall in government ownership that has coincided with SEBI's 2010 mandate to increase free float from 10% to 25%. Private promoters' share in top 500 companies currently stands at 44.7%.

Why FIIs are selling Indian markets?

Of late, on the back of Russia-Ukraine war, FIIs are not only selling Indian equities but those from emerging markets as a whole. Apart from war, FII selling can be attributed to macroeconomic factors such as rising US bond yield, soaring crude prices and spike in trade weighted dollars, says Siddharth Singhai, chief investment officer of Ironhold Capital, a Delaware, USA, based Foreign Portfolio Investor.

Amish Shah, head of India Research at Bank of America Securities, says currently Indian markets are trading at a premium to emerging markets. MSCI India's 1-year forward PE is currently at 24 times against 13 times for MSCI Emerging markets, implying a premium of 88%. This premium is on the higher side as the historical average for premium stood at 46%.

Ownership structure of FIIs in India too played a key role in current selling. As 35% to 40% of FIIs investment in Indian equities is through emerging markets and Asia funds so any negative bias on these regions attract selling in the fund. "Even if you are overweight on India, selling in these fund would be in proportionate terms thus negatively impacting India," he adds.

Singhai opines that FIIs have a tendency to act in unison when it comes to entering or exiting EMs so they tend to have a herd mentality.

Delinking between FIIs flows and retail bets

In the December quarter, FIIs sold $4.8 billion of equities whereas net equity inflows into mutual funds reached $9.3 billion, almost double of what FIIs sold. Even in January 2022, when FIIs sold equities worth $4.4 billion, retail flows sustained well with $3.1 billion of inflows in mutual funds.

"We are seeing a clear sign of delinking between FIIs bets and retail investors' behaviour," says Ramnish Kochgave, president, Investment Banking & Head Equity Capital Markets, Elara Capital.

Kumar of Elara Capital opines, times have changed as emergence of massive domestic liquidity has significantly reduced influence of foreign liquidity on our markets.

Ajay Garg, founder of Equirus Capital, an investment bank, says India is going to generate ₹80 lakh crore as savings in 2021-22 and given a reasonable growth rate in savings we could easily see a cumulative saving of ₹550 lakh crore in next five years. Currently, Indians allocate 3% to 4% of savings to the equity market which may double in next five years and cumulatively bring around ₹40 lakh crore to Indian equity market.

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