What are FIIs and DIIs and how do they impact the stock market?

Ever wondered what FIIs and DIIs are and their significance in the Indian stock market?

Many of us may have heard in recent months about FIIs exiting the Indian stock market while DIIs were buying heavily. While in this month, we saw a strong FII inflow. Ever wondered what FIIs and DIIs are and what is their significance in the Indian stock market?  

Firstly, let’s understand what FIIs and DIIs really are. 

What are FIIs? Foreign Institutional Investors (FIIs), are entities that are registered outside India like foreign banks, foreign mutual funds, foreign governments, foreign insurance companies and foreign universities that are looking to invest their capital in financial markets of an emerging economy like India. FIIs are attracted to emerging economies like India because there is a lot of growth potential and better returns on their investments compared to a developed economy.  

What are DIIs? Domestic Institutional Investors (DIIs) are entities within the country that receive capital through various resources and invest that large amount of money in the home country’s financial markets. Domestic entities include Indian banks, mutual funds, Indian government investments, insurance companies and other institutions. Since DIIs hold a larger huge amount of funds from a number of countries, they can create a greater impact on the growth of the companies they invest in.  

How do FIIs and DIIs buying and selling affect the stock market?  

 The stock market is heavily driven by FIIs and DIIs, forming about 35 per cent activity of the Indian stock market. FIIs and DIIs promote liquidity in the market as they account for investing huge amounts of money that retail investors could not.  

Tracking the FII and DII holdings may give you an idea to predict broader trends in the market. However, it is important to assess the reason behind their actions while making investment decisions based on their holdings.  

When FIIs are significantly selling, the liquidity in the market is impacted. This can create a downward trend in the stock market. However, if the DIIs are correspondingly buying, the impact on the market can be reduced. Whereas, you can notice the uptrend in the market when FIIs are buying as the liquidity in the market is improved. An increase in FIIs can also help increase the country’s forex reserves which enable the RBI to implement monetary operations and reduce the trade deficits in the economy. While FIIs can create a huge impact on the market, DIIs are the ones who are can rescue by pumping funds into the economy and reduce the severity of the downtrend. 

Since the beginning of 2022, FIIs have sold stocks worth nearly Rs 2 lakh crore. This was the result of certain macroeconomic events that led FIIs to exit the Indian market. While FIIs selling could not be the only reason for the volatility we have observed in the market for a couple of months, it has surely impacted the Indian indices to a great extent.  

However, there has been a strong FII inflow since the beginning of November lifting the Nifty index beyond 18000 in just 10 days. From November 1 to date (November 17), net FII purchases stood at Rs 13590.14 crore, whereas DIIs have sold stocks worth Rs 4260.35 crore. 

Below is the graph showing the relationship between Net FIIs and DIIs with the Nifty 50 Index: 

Looking at the graph, we can conclude how FIIs and DIIs affect the market. When there is an inflow of institutional funds, the market tends to be in the uptrend. On the other hand, declining of the index can be a result of the outflow of funds.