.png)
In today's interconnected global economy, understanding the impact of Foreign Institutional Investors (FIIs), Domestic Institutional Investors (DIIs), and Foreign Direct Investment (FDI) is crucial. This blog delves into how these investments shape India's financial landscape, explores the benefits they bring, and examines the current economic scenarios. Are we witnessing a new era where these investments redefine the contours of India's economic power?
What is FDI?
Foreign Direct Investment (FDI) involves a company or investor from one country making a significant investment in a business in another country, extending beyond mere share purchases. This type of investment typically includes establishing new operations, acquiring ownership stakes, or forming strategic partnerships with the intention of gaining long-term influence and control over the foreign enterprise. The primary objectives of FDI are often to enter new markets, access critical resources, and shape the business's strategic direction in alignment with the investor's goals.
India's Foreign Direct Investment (FDI) has grown across sectors, boosting infrastructure, jobs, and exports. Notable investments include:
In July 2023, Walt Disney explored strategic options for its Star India business, considering a joint venture or sale to drive growth and cut expenses.
In July 2023, Havas Group's Indian arm, a leading French advertising and PR company, announced the acquisition of PivotRoots.
In June 2023, private equity giants, including Blackstone Inc., BPEA EQT, CVC Capital Partners, and General Atlantic, were in a competitive race to acquire Mumbai-based Indira IVF Hospital Pvt. Ltd.
In February 2023, Singapore Airlines acquired a 25.1% stake in the Air India group for $267 million.
In January 2023, VilCart, a tech startup focused on the rural economy, secured $18 million in funding from Asia Impact SA, Nabventures Fund, and Texterity Pvt Ltd to expand its operations.
Major FDI sources for India include Singapore, the USA, Japan, the Netherlands, and Mauritius.
What is FII?
The term "foreign institutional investor," or "FII," refers to investors who pool their funds to buy national assets located abroad. Companies that invest money in the financial markets of other countries are known as institutional investors. In order to make the investment, it must be registered with the relevant country's securities exchange board. Mutual funds, banks, hedge funds, insurance providers, etc., are all considered FIIs. Any nation's economy greatly benefits from FII. When a foreign business invests in or purchases securities, the market trend swings up, and vice versa if the investment is withdrawn.
The top FII contributors in India include:
Government of Singapore: Leading with ₹2,41,021 crore invested.
Vanguard Fund: Invested over 58,358 crore
Europacific Growth Fund: Over ₹50,001 crore invested.
Nalanda India Fund Limited: Invested over 42,897 crore
Other notable FIIs include Oppenheimer Developing Markets Fund, Elara India Opportunities Fund, Amansa Holdings, Smallcap World Fund Inc., and East Bridge Capital Master Fund Limited.
What is DII?
DIIs, or Domestic Institutional Investors, are investment institutions based in India that invest in the country's financial assets. These include mutual funds, insurance companies, pension funds, and banks. Both domestic political and economic factors influence their investment decisions.
India's top main domestic institutional investors are:
President of India: The President of India holds stakes in 78 companies valued at ₹ 47.8 lakh crore.
SBI Group: The SBI Group's stakes in 282 companies are valued at ₹9.55 lakh crore.
ICICI Group: The ICICI Group owns a stake in 250 companies with a total net worth of ₹5.30 lakh crore.
HDFC Group: The HDFC Group owns a stake in 271 companies with a total net worth of ₹5.23 lakh crore.
Kotak Mahindra Group: The Kotak Mahindra Group owns a stake in 193 companies with a total net worth of ₹3.14 lakh crore.
Reliance Group: The Reliance Group owns a stake in 27 companies with a total net worth of ₹2.51 lakh crore.
Benefits of Instituitional Investments
Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) play essential roles in strengthening an economy. FIIs bring foreign capital into the economy, which significantly boosts financial resources. This capital is often used for businesses and infrastructure projects, leading to increased economic activity, job creation, and overall growth. The presence of foreign investment also signals a positive global perception of the economy, which can attract additional foreign investments and partnerships.
Conversely, DIIs invest domestic savings into the financial markets, ensuring that local money is used productively. By investing in stocks, bonds, and other financial instruments, DIIs support the growth and expansion of domestic companies. This funding enables companies to expand operations, invest in research and development, and explore new markets and new ventures, thereby stimulating economic development and innovation.
The investment activities of FIIs and DIIs also reflect their confidence in the economy. Large investments from big investors send a positive indication to other investors, potentially leading to higher stock prices and increased market confidence. This can create a virtuous cycle of rising investment and market optimism.
Additionally, FIIs and DIIs contribute to economic stability by providing a steady flow of capital. Their investments help cushion the economy against shocks and downturns, with DIIs playing a particularly stabilizing role during periods of economic uncertainty.
While Foreign Institutional Investor (FII) inflows can be beneficial in boosting a country’s stock market and economy, an over-reliance on them poses significant risks. Excessive FII investment can lead to market volatility, as foreign investors tend to move their capital quickly in response to global events and better investment opportunities, causing sudden and unpredictable market fluctuations. This can create a fragile economic environment, where local businesses and economies are overly influenced by external factors beyond their control. Additionally, large FII outflows can destabilise the currency, leading to inflationary pressures and increased borrowing costs. Thus, while FII investments can provide short-term benefits, too much dependence on them can undermine long-term economic stability.
Overall, FIIs and DIIs enhance an economy by providing substantial financial resources, increasing market liquidity, boosting investor confidence, and supporting long-term economic stability and growth.
Current Investment Scenario
US
Looking at the current U.S. recession possibility, FII & FDI are substantially withdrawing their investments from the U.S. Interest rates in the US have been at historically high levels due to persistently high levels of inflation over the past 2 years. To curb inflation, the Federal Reserve has increased interest rates to the highest level in 22 years. The Federal Reserve increased interest rates by a quarter-point in July, going from 5.25% to 5.50%. Discouragement of New FDI projects, i.e. the planning of any FDI project involves a thorough assessment of financial feasibility, within which lies the cost of capital. If borrowing becomes more expensive due to elevated interest rates, the predicted return on investment (ROI) may decrease.
Subsequently, these new FDI projects may not look as attractive or feasible as they did with lower borrowing costs; hence, FII & FDI are not firm regarding their investments in the US market. Not only the increase in interest rate but also the results of upcoming elections play a major role in understanding the sentiment of the market. All these factors evoke the FIIs and FDIs to search for better investment strategies in different nations as well.
China
China's economy faces several key challenges that are influencing its financial landscape. The real estate sector is under strain, with significant impacts on both household wealth and local government revenues. Additionally, the shift towards high-tech industries, though strategically important, has led to bottlenecks in manufacturing and technological innovation due to a restrictive regulatory environment. Consumer confidence remains tepid, limiting domestic consumption growth. Despite a reported GDP growth of 5.3% in early 2024, a full economic recovery is likely to be slow, with structural weaknesses needing significant attention.
India
Considering India’s stand in the current geopolitical situation it could be considered as a safe bet. Total FDI inflows in the country in the FY 2023-24 is $70.95 Bn and total FDI equity inflows stands at $44.42 Bn.
However, it seems like this year’s budget acts as a crucial role in changing the trend. While the domestic gush of liquidity has dismissed the impact of capital gains tax hike, expensive valuations and a not-so-great Q1 earnings season, foreign institutional investors (FIIs) have sold Indian stocks worth at least Rs 30,000 crore since Budget.
In the last 17 trading days since Budget was presented on July 23, Sensex is weaker by around 1,400 points or 1.7% as FIIs have been incessantly pressing the sell button almost every day.
Domestic Institutional Investors (DIIs) have been actively purchasing shares since the start of the year. Between January and May 28, DIIs have purchased shares worth Rs 1.97 trillion.
According to Bloomberg data, foreign investor holdings in NSE-listed companies fell to an 11-year low of 17.7 per cent during the March quarter. On the flip side, the growing enthusiasm among domestic investors has not only pushed the overall domestic investor holding to 16.1 per cent, but taken the holdings by domestic mutual funds to an all-time high of 8.9 per cent.
It seems like DIIs and retailers have overcome their wounds from this year’s budget and are very bullish for this market.
How FIIs and DIIs Shape India's Financial Future
The future of Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) is likely to be shaped by a combination of global economic trends, technological advancements, and evolving market dynamics.
As globalization continues, FIIs will remain crucial players in the global financial landscape, bringing foreign capital into emerging and developed markets alike. Their role will likely expand as cross-border investments become more accessible, driven by advancements in financial technology and increasing integration of global markets.
However, their influence may also be subject to heightened scrutiny and regulation, particularly in emerging markets where governments may seek to balance the benefits of foreign investment with the need for economic sovereignty.
On the other hand, DIIs are expected to play an increasingly significant role in their home economies, particularly as domestic financial markets mature. With the growth of domestic wealth and savings, DIIs will have more capital to deploy, allowing them to exert greater influence over local markets. They may also benefit from a growing emphasis on sustainable and socially responsible investing as these trends gain traction among local investors.
The rise of environmental, social, and governance (ESG) criteria in investment decisions will likely influence their future investment patterns as both FIIs and DIIs increasingly seek to align their portfolios with these principles.
However, their future will not be without challenges. Global economic uncertainties, geopolitical tensions, and regulatory changes could pose risks to their operations and influence. The competition between FIIs and DIIs for market share in certain regions might also intensify, leading to shifts in investment patterns and market dynamics.
Closing Remarks
Both Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) play crucial roles in shaping India's financial markets. FIIs bring in significant foreign capital, influencing market trends and liquidity, while DIIs provide stability and support during volatile times by investing in the country's growth. Together, these investors contribute to the overall health and dynamism of India's economy, making it a vibrant and attractive destination for global and local investments alike.
Commentaires