Indian Markets & FIIs
What if I told you that the Indian stock market is not just influenced by domestic players (Domestic institutional investors), rather there are other players in the market who are driving the Indian stock market.
Yes, we are talking about FIIs (Foreign Institutional Investors).
Who are these players? Why are they investing in the Indian Stock market? How do they really matter to the Indian participants?
Foreign institutional investors (FIIs) are institutional investors which invest in the assets belonging to a different country other than that where these organisations are based. These
investments can be in the form of debt or equity. The players are: Hedge funds, Pension funds, Asset management companies, endowment Trusts etc. These all are very big players i.e., they invest around ₹1000 crore.
It seems obvious that investment with that much volume does influence the price in the market.
Now the question arises, what makes them invest in the Indian stock market and what influences their decision for investment?
Let’s take an example of two economies: India and the USA. India is a developing economy and the USA is a developed economy. India is a labour intensive i.e., indian economy is driven by labour forces, output is dependent on labour productivity. The USA is capital intensive i.e., US economy is in abundance with capital for investment.
According to the law of Diminishing marginal utility (DMU), after a point of time marginal utility of a good diminishes as an individual consumes more units of a good. Both the economy have reached a saturation point. The Indian economy doesn’t provide higher labour productivity with every successive labour employment and the US economy doesn’t provide higher return on investment with every successive capital investment.
US economy and markets are developed i.e., they provide returns with stagnant growth rate. So, to earn higher returns (alpha returns) they invest in developing economies like India.
It's an oversea investment and investment of around ₹1000 crore needs more than just the analysis of a company. Right?
What are these factors that influence inflow and outflow of FIIs?
- Exchange rate: Let’s say right now, Rupee Dollar exchange rate is trading at ₹70/dollar and later currency strengthens to ₹75/dollar then means now US investors will be able to invest more Rupee in the Indian stock market with the same US dollars.
- Interest rate: US have ultra low interest rate if we don’t consider current interest rate regime, so to earn return higher returns they invests in developing economies like India where interest rates are higher than US but if regulators decrease the interest rate in India or increase the interest rate in US then the Indian stock market will see huge outflow of investments.
- Uncertainty: We have heard this word a lot lately due to COVID-19 and uncertainty in terms of political, economical instability can raise panic in the market resulting in huge outflow of FIIs. During March 2020, when the Govt. of India announced lockdown due to COVID - 19 pandemic, the market saw a huge FIIs selloff of ₹1.18 lakh crore. This resulted in Sensex index fall from 42,270 in february 2020 to 25,630 in march 2020.
Now you know why the market tumbles with such a great magnitude and how policies can influence the FIIs investments in the Indian stock market.
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