FIIs Hold $800 Billion in Indian Stocks, But Selling Remains a Risk

Foreign Institutional Investors (FIIs) continue to hold approximately $800 billion worth of Indian equities, but their persistent selling remains a key risk for the stock market, according to a recent report by BNP Paribas Exane. While India’s dependence on FII inflows has reduced due to strong domestic investments, foreign investors still control a significant share of the market, and their sustained selling could impact market stability.

Declining FII Holdings and Market Impact

The report highlighted that FII holdings in Indian equities have declined to 16% in 2024, compared to their peak of 20% during the FY14-20 period. The drop is attributed to factors such as rising bond yields in the US, which have made US assets more attractive, reducing the appeal of emerging markets like India.

Despite these concerns, India has received net FII inflows in seven out of the last ten years, outperforming other emerging markets. However, recent months have seen Indian equities facing pressure, impacted by factors such as China’s economic stimulus, increasing US bond yields, and high domestic stock valuations.

While domestic mutual funds (MFs) have ramped up their investments, reaching a 10-year high, their holdings still lag behind foreign investors. This suggests that while domestic participation is increasing, FIIs continue to hold a dominant position in the market.

Rising Equity Supply and Market Pressure

Another key challenge highlighted in the report is the record-high supply of equities in 2024, which has surpassed institutional demand. Apart from FII outflows, the market has also witnessed increased promoter selling through Initial Public Offerings (IPOs) and Offers for Sale (OFS). The growing supply of stocks, combined with FII selling pressure, has raised concerns about the market’s ability to absorb excess liquidity.

Despite the continued selling pressure from FIIs, Indian markets have not seen a major correction, mainly due to strong domestic institutional investor (DII) inflows. These domestic investments have played a crucial role in balancing the selling pressure, preventing a sharp downturn. However, the report warns that if the rising supply of equities continues, domestic inflows may not be enough to sustain current market levels.

Conclusion

While FIIs still hold a substantial stake in Indian equities, their continuous selling remains a major risk for the stock market. Although domestic investors have stepped up, their influence is yet to match that of foreign investors. Additionally, record-high equity supply, driven by IPOs and OFS, could further pressure the market. Going forward, market stability will depend on FII investment trends, global bond yields, and domestic institutional participation.