What are Foreign Institutional Investors & their Impact on the Indian Stock Market?

What are Foreign Institutional Investors & their Impact on the Indian Stock Market?

Know about foreign institutional investors: Since 1992, when India opened its markets to the global economy, investment opportunities gradually flooded our country. Year on Year, till the 2008 Housing Market Crisis, foreign investment had been on an upward trend. 

It opened the prospects of economic growth for India, which was a developing nation at the time. This meant better education, job opportunities, and higher standards of living for every Indian citizen.

Allowing foreign investment has led our country into becoming a global economic superpower, standing within the confines of some of the most developed nations in the world. How did this come to be? 

The Answer – Foreign Investments.

Welcome to FinGrad, and today we’re going to talk about Foreign Institutional Investors and how they affect the Indian stock market. 

Who are Foreign Institutional Investors?

An FII is an investment or financial institute that makes large investments outside the country it is registered or incorporated.  

Some examples of FIIs are hedge funds, Investment banks, mutual funds, and insurance companies. To a developing economy like India, they are a major source of foreign income as they provide capital that is otherwise impossible by retail investors. 

Developing countries are the prime opportunities for these firms, as they have growing economies, economic potential, and liquidity of assets.

FII – FDI – FPI – How are they Different?

An FDI is an investment made by a company for long-term capital gains. This investment is made in a foreign country or company. This is done by setting up a whole subsidiary in the country or through a partnership with another domestic company. Their goal is to set up operations in a foreign country and explore business expansion opportunities.

FII on the other hand is an investment made by investors into the markets of a foreign country. Their focus is primarily on short-term gains in the market. This makes it more susceptible to market movement, inflation, and interest rates. This is also why they are required to register on a listed stock exchange to conduct their activities. 

An FPI is a portfolio investor looking to invest in securities for regular passive income. Their primary objective is to gain long-term capital returns on their investment.

Difference between FIIs and FDIs FinGrad
Source: Trade Brains

Foreign Institutional Investors In India 

In India, all FIIs must be registered with the Securities and Exchange Board of India to participate in Indian markets. 

It is important to receive investments from foreign entities as they drive a majority of the capital for projects. To protect the Indian markets in times of crisis. RBI has limited the overall investment that can be made by FIIs. 

For example – An FII can only own up to 24 percent of the paid-up capital of an Indian company and 20 percent in the case of a public sector bank.

ALSO READ: What is Dividend Investing? Meaning, Advantages & Disadvantages!

How does it impact the Indian Stock Market?

FIIs are investors with large capital, capable of swaying the market in their favor. For a long time since their entry into the Indian market in the nineties, they have directly impacted the capital markets here. Their Buy/Sell movement meant the market either zoomed or tanked. Additionally, the difference between the Indian Rupee and Dollar meant they could make billions of rupees worth of trades and be unaffected by this volatility. This is why investors and analysts kept a track of the FII movement in the market. 

Key Pointers of FII

  • Short Term Capital Gains – FIIs should not be confused with FDIs or FPIs. These investors are mainly focused on making short-term capital gains through trading in shares of Indian companies.
  • Increase the flow of capital into the country.
  • These institutional investors observe emerging markets before making investments. This is a major cause for speculators, investors, and analysts to keep track of their movements closely.
  • FII directly affects the price of stocks, bonds, and inflation in the country.
  • The RBI has regulated the investment strategies of these institutes by imposing limits on their overall holdings.
  • They primarily function in the secondary market of the exchange. 

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