Foreign institutional investors (FIIs) have been actively offloading local equities. But here is the clincher. They are selling the big stocks and lapping up the small ones, a game retail investors have played remarkably so far.
During the December 2024 quarter, FIIs increased stakes in only 9 companies among the Nifty 50 companies, turning sellers in the rest. Likewise, in the Nifty 100 index, only 26 firms saw an increase in FII holdings. In contrast, FIIs raised stakes in 44 percent of the stocks within the BSE MidCap index, and even more -- 55 percent—in the small-cap index. Of the 937 companies in the BSE SmallCap index that disclosed shareholding patterns, FIIs increased their holdings in 466 firms while reducing stakes in 425. Stake levels remained unchanged in 46 companies.
Thus far, it has been retail investors who have been the big movers and shakers in the small-cap segment. So, what explains this change? This pivot largely stems from the optimism around IPOs. Deven Choksey of DRChoksey FinServ explained that the increase in FII stakes in mid-cap and small-cap stocks largely stems from investments in the IPO segment. FIIs have capitalized on higher liquidity and lower float in these stocks.
Data indicates that FIIs offloaded over Rs1.56 lakh crore in the secondary market during the December quarter, while investing Rs55,582 crore in the primary market.
Over the past year, IPOs have proven highly profitable for investors, generating returns of 50-80 percent, or even more than 100 percent, on listing, in contrast to the 10-15 percent returns typically seen in large-cap stocks. This trend likely explains the rise in FII stakes in mid-cap and small-cap stocks as well.
Besides, in part, the surge in FII buying in mid- and small-caps may also be due to markets becoming more stock-specific with a general slowdown in the economy and corporate earnings. Kranthi Bathini, Director of Equity at WealthMills Securities, stated that the market is becoming increasingly stock-specific, which may explain why even FIIs are increasing their stakes in mid- and small-cap stocks. Stock outcomes hinge on various factors, including individual stock valuations and tailored portfolio strategies.
Overall, however, analysts highlight that persistent FII selling reflects apprehensions surrounding India’s slowing economic growth, subdued December-quarter earnings, and external uncertainties, such as U.S. tariff policies.
Rajesh Palviya, Analyst at Axis Securities, stated that FII selling persists despite a strong long-term growth trajectory for India. Near-term challenges like the economic slowdown and weak earnings have created headwinds. FIIs are finding U.S. markets more attractive due to supportive macroeconomic conditions there.
"However, we anticipate FII selling to taper off in the next one or two months, as India remains the world’s fastest-growing economy. Factors such as the Union Budget, RBI policy announcements, or quarterly earnings could trigger a reversal in this trend. Meanwhile, DII buying reflects local investors’ deeper understanding of India’s economic potential compared to foreign investors,” Palviya added
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