A foreign institutional investor is an investor in a financial market outside its official home country. Foreign institutional investors can include pension funds, investment banks, hedge funds, and mutual funds.
Definition: Foreign institutional investors (FIIs) are those institutional investors which invest in the assets belonging to a different country other than that where these organizations are based.
Description: Foreign institutional investors play a very important role in any economy. These are the big companies such as investment banks, mutual funds etc, who invest considerable amount of money in the Indian markets. With the buying of securities by these big players, markets trend to move upward and vice-versa. They exert strong influence on the total inflows coming into the economy.
Market regulator SEBI has over 1450 foreign institutional investors registered with it. The FIIs are considered as both a trigger and a catalyst for the market performance by encouraging investment from all classes of investors which further leads to growth in financial market trends under a self-organized system.
The relentless selling by FIIs is on the back of rising inflation globally which has led to spike in interest rates and in turn led to jump in bond yields in US and other developed markets. Spike in bond yields drives away money from emerging markets like India into the US bonds, analysts said.
The worst phase for foreign flows into domestic equities may soon be over.
Analysts believe the quantum of rate hikes by global central banks is likely to moderate going ahead, especially after the US Fed increased rates by 75 basis points on Wednesday.
Commenting on the move, Philip Marey of Rabobank International said, “US Fed chair Powell wants to slow down at some point. The FOMC may be thinking of 50 bps hike in September, followed by 25 bps in the remaining two meetings.”
The slower pace of hikes, in turn, is likely to see flows come back to emerging markets, including India.
Abhijit Bhave of Fisdom Wealth, for instance says, “With global inflation progressively declining and the central banks' aggression over interest rate hikes abating, we anticipate that FII inflows would gather steam over the next two quarters.”
However, analysts caution against intermittent phases of withdrawals given macro-economic developments across major world economies.
According to Anil Sarin, CIO, Centrum PMS, recent buying driven only by events in the US. Narrative changing from inflation expectation to recession. US Fed rate hikes likely to moderate. The worst (in terms of market fall and FII selling) is over.
Since October 2021, FIIs have pulled out over 30 billion dollars from the Indian equity markets.
However, the pace of FII outflow has slowed in July as compared to the previous months.
The Indian markets, meanwhile, saw a sharp drop with the S&P BSE Senses and the Nifty50 slipping around 7 per cent each from their respective high levels seen in October 2021.
According to Morgan Stanley, the biggest foreign portfolio investor selling happened in the technology sector, where they have gone underweight during the recently concluded quarter.
On Friday, the markets will look to consolidate after a busy week. Stock specific action will continue amid June quarter earnings season.
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