FIIs exit meet DIIs conviction past 3 months: Who will blink first?

Since October 2024, FIIs have offloaded $23.5 billion in the secondary market

The unrelenting selling by foreign institutional investors (FIIs) and the sustained buying by domestic institutional investors (DIIs) underscore a stark divergence in their respective funding flows and perspectives on the valuations of Indian equities, as highlighted by analysts at Kotak Institutional Equities. Analysts warn that this prolonged tug-of-war between FIIs and DIIs could potentially strain the balance of payments, erode forex reserves, and create liquidity challenges, all dependent on which group changes its approach first.

Since October 2024, FIIs have offloaded $23.5 billion in the secondary market, while DIIs have stepped in to counteract this with purchases totaling $28.7 billion. In January alone, FIIs sold $5.5 billion in the secondary market, yet DIIs once again played the stabilising role by acquiring $6.6 billion worth of Indian equities. This stark contrast in the actions of these two investor groups illustrates their vastly different circumstances concerning fund flows and their conviction about the valuations of the Indian market.

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Analysts attribute the FIIs’ selling spree to their low confidence in the Indian market and their perception that valuations remain high. "There is no denying that valuations are elevated across the board, except for the financial sector relative to pre-pandemic levels," noted Kotak analysts.

Additionally, external factors like escalating tensions between China— a significant component of emerging market (EM) indices—and the US, along with the "America First" policies of the new US administration, are adding to the uncertainty for global asset allocators and investors.

In contrast, DIIs continue to display high conviction in the market's potential for decent returns, underpinned by a price-agnostic investment approach. Analysts point out that strong inflows into domestic equity mutual funds have bolstered DIIs’ confidence. However, they caution that diminishing trailing returns and steep corrections in various stocks across market caps and sectors over the past 6-9 months could erode retail investor confidence, potentially disrupting the inflows that DIIs rely on.

Looking ahead, the future trajectory of the Indian market will likely depend on which group—FIIs or DIIs—alters its stance first. If FIIs regain confidence in valuations or see improved returns in broader emerging markets, their selling pressure may abate. Conversely, if retail investor enthusiasm falters due to weaker returns or widespread market corrections, the market could face a steeper decline.

For now, the opposing convictions and circumstances of FIIs and DIIs continue to shape the Indian market, making it a stage for shifting dynamics and evolving investor strategies.

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