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MOSL : INDIA STRATEGY: Flowing matters – Deciphering the ‘In–N–Out’ of Institutional Flows

.  INDIA STRATEGY: Flowing matters – Deciphering the ‘In–N–Out’ of Institutional Flows

Total Institutional ownership of Indian equities has remained stable at around one-third (~33%) over the last five years. However, the verve of institutional flows has transformed distinctly of late, with domestic institutional investor (DII) flows markedly outpacing foreign institutional investor (FII) flows over the last seven years.

In this report, we delve deep into the character of the ‘Institutional Flows’.

The tug of war: FIIs v/s DIIs – the contrasting trends

• Divergent trends can be detected in the dynamics of FII and DII flows in India with a large part of the period under study being dominated by FII flows. While FII flows ebbed post-FY15, DII flows accelerated meaningfully, especially mutual fund (MF) inflows.
• After witnessing massive inflows of USD38.5b over Apr’20-Sep’21, FII flows reversed the trend with an outflow of USD33.3b during Oct'21-Jun’22. However, despite FII outflows, the Nifty is up 1.4% in CY22YTD that underscores its resilience.
• FIIs: Over the last 30 years beginning FY93, FIIs have invested USD190.8b in the Indian Equity markets. The six-year period – FY10-15 – was the peak with cumulative FII inflows of USD114.5b. After peaking in FY15, FII inflows tapered off to a cumulative figure of USD11b over FY16-20. Inflows revived in FY21 at USD37.3b; post which, FY22 saw the highest ever outflows in a year at USD17.1b with USD8.6b of outflows being recorded in FY23YTD.
• DIIs: Over the last 23 years beginning FY00, DIIs have invested USD90.6b in Indian Equity markets. However, the breakup of DIIs into MFs and ex-MFs was made available in FY07; since then, DIIs have invested USD88.8b in the Indian markets. While Indian MFs invested USD81.3b, other domestic funds – ex-MFs invested USD7.5b. Notably, a large part of the USD90.6b DII flows – USD86.7b – was recorded over the last eight years (FY16-23YTD).
• Consequently, DII ownership of Indian Equities increased to 14.2% in Jun’22 from 10.9% in Jun’12; while FII ownership diminished to 18.4% in Jun’22 from 22.5% in Mar’15. Notably, FII holding is the lowest since Dec’12. In terms of free-float, FII ownership declined to 38% from 46.2% over a similar period mentioned above, while DII ownership jumped meaningfully to 29.5% from 24.2%.

Sectoral FII flows: 73% of outflows in 1QFY23 driven by five sectors

• We have used Nifty-500 as a proxy for a detailed analysis of the sector flows, as the index contributes 92% to India’s current market cap.
• According to our analysis, FII outflows in Nifty-500 stood at USD16.8b in 1QFY23. Sectors recording the highest outflows were Technology (USD4.2b), Private Banks (USD3.8b), NBFC (USD2.5b), Oil & Gas (USD1b), and Metals (USD0.8b).
• Healthcare was the only sector to report nominal inflows of USD0.1b.
• Key observations over the past few quarters: Technology, Private Banks, and NBFCs continue to see steady outflows; while, Metals and Utilities that recorded inflows in 4QFY22 too saw outflows in 1QFY23. The extent of outflows subsided for Insurance, Consumer, and Chemicals.

During the last three quarters, FIIs recorded cumulative outflows of USD44b from Nifty-500; of this, Private Banks topped with USD11.3b, followed by Technology at USD9.6b, and NBFCs at USD6.5b.