In June 2022 the Foreign Institutional Investors (FIIs) made a historic high in the Indian equities market, albeit of the kind that the Indian market definitely does not rejoice.

The past eight months resulted in the longest continuous selling spree for FIIs in the Indian equity market, breaking all past selling records. The last time the Indian market witnessed such exodus was in 2008, during the U.S. sub-prime crisis, when FIIs kept selling for 7 consecutive months.

Between October 2021 and May 31, 2022, FIIs sold equities worth ₹2.05 lakh crore. In the first six days of June, they sold another ₹5,983 crore taking the tally to ₹2.11 lakh crore between October 2021 and June 06, 2022. In calendar 2022 so far, FIIs have sold equities worth ₹1,73,138 crore.

Earlier, in the gloomy year of 2008 that was hit by the subprime crisis, FIIs sold equities continuously between May and November 2008, totalling ₹44,378 crore. In the entire calendar of 2008, they sold equities worth ₹52,987 crore.

Compared to the selling spree of 2008, they have sold 398% more in the past 8 months. In the current calendar year, up to June 06 2022, FIIs sold 327% more than what they sold during the entire 7 months of 2008.

In fact, foreign institutional Investors are contributing to a multi-year low participation in the Indian equities market. The contribution of FIIs has reduced to less than 20% currently, while retail and domestic mutual fund participation is growing by leaps and bounds. Following the great financial crisis low of 15%, in March 2009, FIIs’ ownership in the Indian equities market had peaked to 23% post 2015.

However, there has been a steady decline from 2021 December quarter and has now gone below the 20% mark. Strength of domestic investors can be gauged from the fact that Nifty slipped 36.2% in 2008 but despite heavy selling by FIIs in current leg of downfall, market declined just 15% from its all time high of 18606.

Meanwhile FIIs pulled out ₹61,973 crore (approximately $8.34 billion) from Indian equities in March 2020, the biggest monthly outflow, based on the National Securities Depository data available as far back as 2002.

What is leading FIIs to sell Indian equities?

Strong U.S. dollar is leading to asset re-allocation and portfolio realignment of big global funds. As an aftermath of the present commodity crisis, commodity exporting countries appear more lucrative as compared to importers. While net importers like India whose growth story is essentially a consumer growth story, seems to be vulnerable to stagflation.

Whereas FIIs have pulled out a record $22 billion from the Indian equity market in the current calendar year, resource exporting nations like Brazil, Indonesia, and Malaysia have seen an inflow of $12.5 billion, $5 billion and $1.7 billion, respectively, merely within the first quarter of the current calendar year.

Another reason for FIIs pulling out from the Indian market is its outperformance in the emerging market sphere in the past few years. Deepak Jasani, Head of Retail Research, HDFC Securities says that FIIs were compelled to book profit in Indian equities as many emerging market funds were in the red. “FIIs were booking profit in India while making losses in Chinese and Russian markets in 2021-22. So taking out some profit from the Indian market was the logical move”, he adds.

Not only in short-term but also in the long term Indian equities outperformed MSCI emerging market with a big margin. Between January 01, 2010 and May 10, 2022, Indian Index Nifty moved from 5232 to 16117 and delivered 10% CAGR while Emerging Market Index delivered almost zero percent return in the same period as Morgan Stanley Country Index (MSCI) EM Index moved from 989 to 1007.

India's weight in MSCI Emerging Markets index stands at 13.64%, while China is at 30.57%, Taiwan at 15.45%, and Brazil at 5.93%. As of the end of January, before troops crossed over Ukraine’s border, Russia’s shares held a weight of about 3.2% in MSCI’s Emerging gauge, making it the eighth biggest constituent. That number slid to 1.6% by the end of February, before Russian equities were removed entirely on March 09.

What does this mean for the Indian equity market?

It is quite clear that the current Indian market is strong because of its growing retail participation. Keeping the trust of Retail participants and educating them is essential for retaining them in the equity market. The regulator, institutions and the myriad businesses that run the equity markets need to be more retail consumer focussed rather than institutional consumer focussed in order to keep the buoyancy of the market. Better accessibility through enabling technology, more information and education of consumers, and regulations empowering smaller investors will be the key to the growth of the Indian equities market, if it has to keep growing on the back of its retail participants.

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