FII Selling vs DII Buying: Who Is Supporting the Indian Stock Market?

Indian stock market was broadly lower on Tuesday as Foreign Institutional Investors (FIIs) continued their selling spree while Domestic Institutional Investors (DIIs) bought shares in the Indian stock market in huge volumes, resulting in a contrasting situation for investors to study the direction of the market.

On 8 October FIIs recorded a net sale of Rs 12,944 crore while DIIs made a purchase of Rs 10,703 crore, according to stock market data. However, the large-scale domestic buying was not enough to offset the huge selling pressure, as Nifty 50 closed 1.64 per cent down at 22,231.80 while Sensex fell 1.44 per cent to 71,593.24 points.

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Why Are FIIs Selling?

Foreign investors are quick to react to changing conditions in global markets. They may scale back their presence in emerging markets like India if overseas returns start to look better or more appealing.

Several factors are weighing on investor sentiment. Crude oil prices above $100 per barrel are a worry for India as it is one of the world’s largest importers of crude oil. High prices of crude not only burden the current account but also the rupee and inflation.

High yield US bonds may draw money away from emerging markets as compared to US equities. Currency fluctuations and fears of earnings may also play a role. RBI’s recently reported 25-bps hike of repo rate which now stands at 5.50% also plays an important role for investors to take into account as rates hikes usually curb business activity and stock values.

How Are DIIs Supporting the Market?

While foreign investors are selling, domestic institutions are buying and offsetting their impact on the market.

DIIs include mutual funds, insurance companies and other domestic institutional investors. Their inflows are to a large extent driven by retail investments in mutual funds through systematic investment plans (SIPs) and contributions to insurance and pension funds.

Unlike foreign investors, who are often motivated by interest rates and fluctuations in the exchange rate, domestic players tend to have a different time horizon and can take advantage of market corrections.

Domestic demand, however, does not always push the market upwards, especially when there is significant selling pressure on the foreign front.

Can DII Buying Stop the Market Fall?

Domestic institutional buying is providing an important cushion, but it may not be enough to trigger a sustained recovery on its own. If crude oil prices remain elevated, the rupee stays under pressure and global investors continue to withdraw money, market volatility could persist.

Investors should also watch corporate earnings, global bond yields and the direction of foreign fund flows. A slowdown in FII selling, combined with continued DII buying, could help improve market sentiment.

What Should Investors Watch Next?

While the current trend shows the growing importance of domestic investors to the Indian equities, the next leg of movement will be decided by whether domestic buying could offset the foreign outflows and if the global worries start to ease.

For investors, the focus must remain on fundamentals of companies, valuation and investment goals rather than the day-to-day institutional flow figures. While FII selling could create near-term pressure, it does not mean that every stock is a bad buy. Similarly, DII buying should not be seen as a sure-fire way to a market recovery.

Conclusion

Domestic institutional investors are currently bailing out the Indian equities from large foreign selling. However, the situation will change fundamentally when the global situation improves. The rally will be there only when oil prices fall and foreign fund inflows will resume. So until then domestic buying will hold the markets down.