Foreign Investors' Stake In NSE-listed Firms Drops To 12-Year Low At 15.98%

The share of foreign investors in NSE-listed companies has fallen to 15.98 per cent as of October, the lowest in twelve years. Foreign Institutional Investors (FIIs) held Rs 71.08 lakh crore in equity assets under custody, an 8.8 per cent decline from Rs 77.96 lakh crore in September – marking the steepest fall since March 2020. In contrast, the share of mutual funds rose to a record high of 9.58 per cent in October, with mutual fund holdings valued at Rs 42.36 lakh crore.

The FII and mutual fund share is calculated by dividing the assets under custody (AUC) for October, as per NSDL, by the average daily market cap of all NSE-listed companies. Domestic institutional investors (DIIs) also showed strength, with analysts projecting their holdings to surpass FIIs, supported by over Rs 1 lakh crore in October inflows.

Anirudh Garg, Partner and Fund Manager, Invasset PMS, said, “Foreign Institutional Investors (FIIs) have significantly reduced their holdings in Indian equities, reaching a 12-year low due to several factors. The current valuation of Indian stocks, trading at around 24 times expected earnings, appears high compared to Chinese stocks, which are at approximately 10 times. Economic concerns, including weak corporate earnings and declining consumer demand, further exacerbate this situation. Additionally, a global risk-off sentiment, driven by renewed fears of inflation and potential monetary tightening by central banks, has led FIIs to withdraw from the Indian market.”

Meanwhile, mutual funds and retail investors have continued to increase their stakes in the Indian market, marking a shift towards domestic investors.

Chinese Stimulus, Geopolitical Concerns

The FII-to-DII ownership ratio fell to a historic low of 0.24 by the end of September 2024, reflecting the recent FII pullback. Divam Sharma, Founder and Fund Manager, Green Portfolio PMS, highlighted, “China’s recently introduced stimulus package brings a fresh positive outlook for the Chinese economy. However, that’s not the only reason behind FII outflows. US elections and global geopolitical tensions have added to the problem. On top of that, the earnings season was lukewarm, and several sectors in India disappointed in the Q2 earnings.”

The shift towards Chinese assets was largely driven by the country’s recent aggressive monetary easing measures, contrasting with the high valuations of Indian equities. Sonam Srivastava, Founder, Wright Research, explained, “Foreign Institutional Investors (FIIs) are reducing their exposure to Indian equities, influenced by concerns over high valuations and subdued corporate earnings. Concurrently, China's recent economic stimulus measures have enhanced its appeal, prompting a reallocation of investments from India to China.”

Despite the FII pullback, Srivastava remains optimistic about India's resilience. "India's strong economic fundamentals and a resilient domestic investor base suggest that the market can withstand these outflows and maintain its growth trajectory. The future outlook remains positive, with expectations of sustained economic expansion and potential policy measures to attract foreign investments back into the Indian market," she added.

Analysts expect the October domestic inflows, particularly from DIIs, to support India's capital markets in the near term, despite FIIs selling off due to elevated Indian stock valuations and concerns over inflation and potential central bank tightening. The future of FII investment in India may hinge on the nation's economic performance and further regulatory reforms to regain investor confidence and attract capital inflows back into the market.