I. Introduction
Foreign Institutional Investors, or FII, play a crucial role in the Indian investment market. But do you know what its role is in the investment market, or what causes FII inflow and outflow? If you do not know the answers, keep reading. In this article, we not only discuss the basic concept of FII but also highlight the essential factors that lead to FII inflow and outflows in India in 2025.
II. Understanding Foreign Institutional Investor (FII) flows
FII has a long history in the Indian stock market or investment market; it can be traced back to 1992. So, if you are interested in the investment market, understanding foreign institutional investors or FII flows is a must.
A. Definition and importance
Before we learn more about the causes of FII inflows and outflows, let’s learn more about what FII is and its importance in the Indian investment market. By definition, FII refers to firms or agencies that invest in assets of different countries except the country that they have registered under. Examples of FIIs may include overseas pension funds, mutual funds, banks, asset management companies, charitable trusts, institutional portfolio managers, and a lot more.
FIIs play a crucial role in any growing investment market. They play the role of catalyst or key driver of investment market growth.
B. Overview of FII activity in India
Now that we have learned what FII is and its importance in the Indian investment market, here is a brief overview of FII activity in India. In India, FIIs have acted as net buyers since 1992, when they entered the Indian investment market for the very first time. The number of FII inflows only witnesses a rise with time. The years 2013–14 (Rs 79,709 crores), 2014–15 (Rs 1,11,333 crores) and 2017–18 (Rs 1,19,036 crores) were when India witnessed the most aggressive FII inflows.
However, in global crisis moments, FIIs show significant outflows resulting in major damage to the Indian stock market. For example, the Lehman Brothers crisis in 2008–09, where FIIs pulled out Rs 47,706 crores from India.
III. Factors causing FII outflows
We have discovered what FII is and a brief overview of FII flow activity in India. Now, we will explore the factors that cause FII outflows in the Indian investment market.
A. Economic conditions
The first and foremost reason behind FII outflow from the Indian investment market is the global economic condition. The state of the global economy has great influence over the FII flows. These investors typically shift their investments from an emerging economy to stable ones during any economic crisis, leading to a significant outflow from the emerging economy.
B. Political instability
Political instability also plays a pivotal role in causing FII outflow in the Indian investment market. Both global and country-specific political tension or instability in FII outflows. When the political status of a country or a region goes under significant turmoil FIIs shift their investments to a more politically calm environment leading to a major outflow from the politically unstable country or region.
C. Currency fluctuations
Another major factor that causes FII outflows in the Indian investment market is currency fluctuations. FIIs tend to shift their portfolio when the local currency shows a constant downward trend or continuously fluctuates leading to greater inflation. Therefore, when the value of Indian currency faces fluctuations it leads to FII outflows.
D. Global market trends
Last but not least, global market trends also impact FII flows. If the global trends show increased investment in a stable economy or a new emerging economy the FIIs will also follow the global market trends and shift their investments from the current country to the potential country leading to a major FII outflow from the country.
IV. Factors causing FII inflows
Like FII outflows several factors contribute to FII inflows. Below, we will discuss some essential factors that cause FII inflows in detail.
A. Economic growth prospects
The first and most important cause of FII inflows in a certain country is economic growth prospects. The domestic economic growth prospect can lead to a significant increase in the FII purchase as they see the economic growth prospect of a country or region as an ideal for their increased investment returns.
B. Market performance
Another essential factor that can lead to increased FII inflows in a country is market performance. The national financial market performance can have a significant contribution to FII inflows. For example, a growing market for stocks, bonds, and shares may attract more FII inflows than others.
C. Stable political environment
As the political instability leads to FII outflow, the opposite condition can bring FII inflows. To be more specific, a stable political environment can lead to increased FII inflows in the country as FIIs feel more secure about their investment future in such an environment.
D. Interest rates and monetary policy
Lastly, higher interest rates and favorable monetary policies can lead to a significant increase in the FII inflows in a country. Favorable monetary policies from the local government and regulatory body can boost the confidence of FIIs in investing in the country’s assets. On the other hand, higher interest rates on investment can also attract more FII inflows as they have greater scope to secure higher returns from the investment.
V. Impact of FII flows on the Indian market
FII still plays an important role in the Indian stock market and overall economy. That is why, it is necessary to know the impact of FII in the Indian market to properly understand what is FII. Below is how foreign institutional investors influence the Indian market:
A. Stock market reactions
FII has a strong influence on the Indian stock market. It is one of the primary reasons for stock market volatility in India. Foreign institutional investors’ investment decisions can cause fluctuations in the stock market impacting the indexes. FII also boosts market efficiency by providing foreign capital.
C. Exchange rate movements
FII also impacts the exchange rate ratio. A higher FII inflow can influence a healthy exchange ratio. The more FII investment is received in the Indian stock market, the higher the export ratio in the market. Similarly, lower FII inflow or higher FII outflow can negatively impact the exchange rate movements.
D. Economic indicators
Various economic indicators of the country such as GDP growth, interest rates, and inflation are also impacted by foreign institutional investors or FII. It helps to strengthen the Indian capital structure, improve the capital market, and promote healthy competition in the financial market contributing to the overall economy of the country.
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VI. Case studies
It is important to consider case studies and real-life examples to understand what is FII and what is meant by FII inflows and outflows. Read the following sections to learn more about some recent instances of FII outflows and inflows in India.
A. Recent instances of significant FII outflows
One of the most important recent instances of significant FII outflows is after the Union Budget in India. Since July 2024, Foreign institutional investors have continuously sold their shares (which include equity, debt VRR, debt, and hybrid stocks) resulting in 300 billion in FII outflows in India.
As of 3 October 2024, the FII outflow of India stands at 32,555.18 crores.
B. Recent instances of significant FII inflows
Like the rising FII outflows caused by the overvalued Indian market after the Budget in July 2024, FII inflow has also considerably increased. The trend of FII inflow remained similar to date.
As of 3 October 2024, the FII inflow of India stands at 17,311.91 crores.
VII. Conclusion
FII or foreign institutional investors have been contributing to the country’s investment market for decades. They are more of a catalyst or growth drivers of the growing economy.
A. Summary of key factors
FIIs have been contributing a significant role in the Indian investment market since their inception in 1992. Not only that, the country has witnessed a series of FII inflows and outflows based on the changing circumstances of the country. There are several factors that affect the flow of FIIs in the market. Above, we have discussed what is FII including the reasons for FII inflows and outflows.
B. Future outlook for FII flows in India
The country has witnessed an FII outflow trend in the past few months. However, the change in the global and domestic market/financial environment shows a positive future for FII inflow. Also, improved monetary policies and a positive government approach are required to increase the FII inflows in the near future.
FAQs
1. What is the FII outflow in 2024?
A. FII outflow significantly impacts the trading and economy of a country. After the Union Budget on 23 July 2024, the FII outflow in India is approximately 300 billion.
2. Why is FII leaving India?
A. There are various reasons for FII leaving India. Experts think that geopolitical tensions in the Middle East and the overvalued Indian market. They find undervalued markets preferable.
3. What are the determinants of FII in India?
A. The primary determinant of FII in India is official policies determining home and host country risk-returns. Financial liberalization, commercial linkages, and other such factors also impact FII inflow in India.
4. Who controls FII in India?
The Securities and Exchange Board of India regulates FII investment in India while the Reserve Bank of India maintains a ceiling on FII.
