Who is Managing Indian Equities?

FPI Holdings at 12-Year Low: Implications for Indian Markets

Since the pandemic, Indian investors have increasingly flocked to equity markets, either directly or through mutual funds, leading to an exponential rise in mutual fund and demat accounts. This surge in domestic investment has been a key factor in positioning Indian markets among the top global performers.

While domestic investors have been actively buying, foreign portfolio investors (FPIs) have gradually reduced their exposure. This shift has significantly narrowed the gap between domestic investors and FPIs, bringing it to a historic low. For instance, the gap between foreign institutional investor (FII) and domestic institutional investor (DII) holdings was at its widest—49.82%—in March 2015.

Currently, FPIs' holdings in NSE-listed shares have decreased to 17.9%, according to the NSE's annual report. However, data from Prime Database Group shows an even sharper decline, with FPI holdings dropping to 17.38%, marking a 12-year low.

On the other hand, domestic investors have increased their combined holdings (both direct and indirect through mutual funds) to 24% by FY24, slightly below the 24.2% in FY23. The rise in SIP contributions, new fund offerings (NFOs), and increased direct investments in the June quarter, totaling around Rs 1.09 lakh crore, have helped mutual funds grow their market share.

Additionally, the shareholding of retail investors and high-net-worth individuals (HNIs) has reached an all-time high of 25.85%. Retail and HNI holdings have increased from 9.52% in March 2024 to 9.62% currently.

Despite this positive trend, there is concern over promoters reducing their stakes during the ongoing bull run. As of June 30, 2024, private sector promoters' share had fallen to a five-year low of 40.88%.

The growing share of domestic investors provides a buffer for Indian markets against global volatility. While foreign investment remains crucial for market buoyancy, a lower FPI holding can help mitigate the impact of global events, such as the recent Yen Carry trade. With FPIs holding a smaller share, their withdrawals in response to such events would have a reduced impact on the market

In July, foreign investment in Asian equities experienced a sharp slowdown due to increased market volatility, heavy selling in technology stocks, and disappointing economic data.

Foreigners bought just $459 million worth of regional equities, a significant drop from the $7.16 billion inflows in June, according to LSEG data.

Key factors contributing to this decline included fears of a potential second Trump presidency, which raised concerns about new tariffs on Asian exports, and the global slump in AI and semiconductor stocks, which particularly affected markets like Taiwan and South Korea.

Taiwan saw its largest capital outflow in 10 months, totaling $4.74 billion, while South Korean equities faced $962 million in outflows in the first few days of August.

Despite the regional downturn, Indian equities attracted substantial inflows of $3.87 billion, driven by the country's strong economic performance and resilience to global volatility.

India's Nifty index outperformed with a 3.92% gain, compared to the MSCI Asia Pacific's 1.72% rise. Conversely, markets in Vietnam and Thailand saw outflows, while the Philippines received modest inflows.

 Who is savings Indian Markets?

Indian equities have experienced relatively mild declines over the past two years, even during global market selloffs. Analysts attribute this resilience to strong domestic inflows, which have helped cushion the local market from sharper drops.

For example, when the Bank of Japan recently raised its key interest rate to 0.25% from near-zero to counter the yen's decline against the US dollar, most Asian markets saw declines between 4% and 11% over five trading sessions. In comparison, India's Nifty index fell by just 3.8%.

Since 2022, domestic institutions, led by mutual funds, have invested nearly ₹7.34 lakh crore in equities, while foreign institutional investors have sold shares worth ₹85,000 crore during the same period.

Between April 1 and April 17, global indices like the Dow Jones, Nasdaq, Nikkei, and Kospi fell between 4% and 6%, whereas the Nifty declined by just 1.4%. Similarly, during the period from October 17 to October 27, 2023, when the Nasdaq, Dow Jones, Nikkei, and Kospi dropped by over 4%, the Nifty only fell by 2.3%. Foreign Portfolio Investors (FPIs) infused ₹32,365 crore into Indian equities in July, with significant allocations to the IT sector, which saw inflows of ₹11,763 crore. However, FPIs pulled out substantial funds from the Financial Services sector, indicating a selective approach towards sectors that benefit from domestic growth while avoiding those vulnerable to global downturns.