Mumbai (Maharashtra) [India], February 10 : Foreign institutional investors (FIIs) continue to hold approximately USD 800 billion worth of Indian equities, but their ongoing selling remains a risk for the stock market, according to a report by BNP Paribas Exane, a European equity research firm.
The report highlighted that while India's reliance on FII inflows has reduced due to strong domestic investments, foreign investors still hold a significant portion of the market. Their persistent selling could impact market stability.
"While India's dependence on FII inflows has reduced due to its strong domestic flows, FIIs continue to hold cUSD800b in Indian equities and their continued selling remains a risk for the market, in our view," the report said.
As per the data, FII holdings in Indian equities have declined to 16 per cent in 2024 from a peak of 20 per cent during the FY14-20 period.
At the same time, the report also mentioned that domestic mutual funds (MFs) have increased their investments in Indian equities, reaching a 10-year high.
However, their holdings are still lower than those of foreign portfolio investors (FPIs). This indicates that while domestic investors are playing a bigger role in the market, FIIs remain influential.
One of the key concerns for FIIs is the rising bond yields in the US. Higher yields make US assets more attractive, reducing the appeal of emerging markets like India. Despite this, India has received net FII inflows in seven out of the last ten yearsmore than any other emerging market.
However, in recent months, Indian equities have faced pressure due to a combination of factors, including China's economic stimulus, increasing US yields, and high valuations in India. These factors have contributed to weaker market performance.
Despite FII outflows, the Indian market has not seen a sharp decline because strong domestic institutional investor (DII) inflows have balanced the selling pressure. This has helped prevent significant corrections in the market.
However, another challenge is the increasing supply of equities. In 2024, the supply of stocks in the market has reached a record high, surpassing institutional demand. Apart from FII selling, promoter selling through Initial Public Offerings (IPOs) and Offers for Sale (OFS) has also contributed to the excess supply.
The report warned that continuously rising supply could be negative for Indian equities, as most domestic inflows will be absorbed in countering this supply. This may also limit stock market valuations in the near term.
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