Jan 10, 2017 08:28 AM IST IST | Source:

COMMENT: Have DIIs replaced FIIs as the driving force for markets?

Correlation coefficient, which is normally positively skewed towards FII flows, has witnessed a change since demonetisation and is more in sync with DII flows.

Shishir Asthana
Moneycontrol Research

Foreign institutional investors (FIIs) have been relentless sellers since demonetisation and US elections coincided on November 9. Since that day FIIs have sold Rs 31,512 crore worth of equity shares in the country. Data shows FIIs were buyers for only four of the last 41 days since demonetisation.

It has been an accepted fact that FIIs buying and selling decides the trend of the market. Based on data available there has rarely been a negative correlation coefficient between FII buying and selling with market movement.

A correlation coefficient determines the degree to which movement of two data series are associated.

Over the last 10 years FII buying and selling data and the fifty stock Nifty-50 has a positive correlation of 0.34. This means the buying by FIIs generally leads to a rise in Nifty while a selling by FIIs leads to a drop in Nifty.

Though domestic institutional investors (DII) have been a significant player in the market, their correlation coefficient is a negative 0.16. Rarely have DII actions in the market had an impact on market direction.

However, since demonetisation the relationship has changed, especially for DIIs. Since November 9 Nifty has moved from a level of 8543.55 (closing of November 8) to a low of 7965.5, a fall of 6.76 per cent in the first 11 days. During this period FIIs sold Rs 15,579.81 crore while DIIs bought Rs 11,536 crore. DIIs buying were not enough to cushion the fall.

However, since then Nifty has stabalised but FIIs selling continued. FIIs sold Rs 15,933 crore since then but Nifty has moved higher to 8243.8 on January 6. During this period DIIs have bought Rs 14037.69 crore of equities which has helped support the market.

Calculating correlation coefficient based on a continuous trailing 30-day basis shows that DII buying has much statistically impacted the market direction. DIIs have a very strong positive correlation of 0.35 during for the past 30 days as compared to a much weaker 0.06 for FIIs.

Does this mean FIIs will have a less impact on the market, or is it a one-off event? Numbers again reveal the fact that the only reason DII buying has held the market is because FIIs selling has slowed down. Against an average selling of Rs 1416 crore in the first 11 days FIIs were selling at a rate of only Rs 531 crore since then. This could possibly because of holiday season for FIIs.

While one can take comfort from the fact that DIIs have helped stabalise the market, it is not because they are strong buyers but only because FIIs have turned weak sellers. If FIIs turn active again, markets could again move in the direction of foreign flows.

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