October surprise: An influx of retail investors hasn’t made FIIs irrelevant

Foreign institutional investors (FIIs) have been on a selling spree in October. By the end of last week, they had net sold stocks worth ₹85,790 crore. The monthly net selling/buying data for FIIs is available from January 2002 onwards. 

As per this data, this is the highest ever net selling carried out by FIIs during the course of a month, even higher than the net selling of ₹61,973 crore in March 2020, back when the realization that covid would wreak havoc on the world at large had started to set in.

Now, the thing with big round numbers is that they make for nice headlines in the mainstream media and viral content on social media. But they lack nuance. There are two problems with looking at the net selling figure of ₹85,790 crore in isolation. 

Also read: FIIs pulling out of India is not a surprise. But where is their money going?

First, it’s in absolute rupee terms, which does not take the rupee’s depreciation into account, given that most FIIs measure returns in US dollar terms. Second, it does not take into the account the money that FIIs have already invested in Indian stocks.

In US dollar terms, FIIs have net sold Indian stocks worth $10.2 billion during October, with a few days of the month still left at the time of writing this. Even in dollar terms, this is the highest amount of net selling carried out by FIIs, higher than the $8.3 billion figure on record for March 2020.

Now, even this does not give us the complete picture. It does not take into account the total amount of money that FIIs had invested in Indian stocks before they sold what they did this month. This is important because their selling is a proportion of what they already owned.

As of 30 September, the total equity assets under FII custody had stood at a little over $930 billion. Net sales of $10.2 billion in October works out to 1.1% of what these institutions already owned. 

How big is this? In March 2020, when FIIs net sold Indian stocks worth $8.3 billion, it was around 2.1% of what they owned at the end of February 2020.

In June 2022, when FIIs net sold stocks worth $6.4 billion, it was 1.13% of what they owned at the end of May 2022.

So, as a proportion of what FIIs owned, their net sales figure for October is the third highest number ever. But this comes with the disclaimer that the data for equity assets under custody of FIIs is available only from January 2012 onwards, limiting this analysis.

In fact, in January 2008, FIIs had net sold Indian stocks worth $3.3 billion. In June and October of 2008, they net sold stocks worth $2.4 billion and $3.1 billion, respectively. 

Also read: Nine-month high FPI inflows lift India’s global weight

This selling, as a proportion of what FIIs would have owned at that point of time, would have definitely been higher than their current sell-off figure.

The long and the short of it is that the FII selling situation may not be a happy one for the Indian stock market but it isn’t as bad as it is made out to be. At least, not currently. And this leads to multiple points.

First, the broad story being told is that FIIs are ‘selling India and buying China.’ Maybe they are. But it’s also worth remembering that equity assets under custody of FIIs have gone up vastly over the past one year. 

This total was $651 billion as of September 2023, in comparison with $930 billion as of September 2024. This is primarily because Indian stock prices went up quite a bit in the last one year. So, some profit-booking on the part of FIIs was bound to happen at some point of time.

Second, it has also been argued that FIIs are selling because they need to pay a capital gains tax in India. The thing is that this tax wasn’t introduced in October. So, this argument does not hold.

Third, there seems to be some panic in the stock market, particularly among retail investors. That’s natural. As per the National Stock Exchange, the unique investor base stood at 31 million as of March 2020 and jumped to around 104 million by September 2024, which implies that more than 70% of these investors have an experience of less than five years in Indian stocks. 

And in this time frame, they have only seen stock prices go up. Hence, a fall of 7.5% in the S&P BSE Sensex from its highest closing figure, a peak recorded on 26 September, has got them worried. 

Their limited experience is hurting them, given that the stock market does not compound at a fixed rate. But it is worth remembering that the market is still 10% up from where it had closed on 4 June, the day India’s Lok Sabha election results were declared.

Fourth, over the last couple of years, there has been a lot of ‘loose’ talk about how the Indian retail investor has made FIIs irrelevant. But this, as we have seen through October, isn’t really turning out to be true. 

Also read: FPIs offload ₹85,790 crore in Indian equities: Sell-off hits 10-month high on shift to China stocks; What next?

The NSE Market Pulse report for October points out that, as of 17 October, FIIs had pulled out $8.4 billion from India during the month and that domestic institutional investors, which largely invest retail money, had almost matched that with a net-investment of $8.2 billion. But stock prices had still fallen. 

This implies that while retail investors own more stocks than before, FIIs continue to be influential participants in the Indian stock market, and any sustained behaviour on their part will have an impact on stock prices. It’s premature to speak of FIIs being turned irrelevant.