Increased Domestic Institutional Ownership in BSE500 Stocks: A Surge to 16.9% in Q4 Highlights Investment Potential

• The Indian stock market is experiencing pressure due to sustained foreign capital outflows, with Foreign Institutional Investors (FII) selling off Indian equities worth nearly ₹25,000 crore in the first seven trading sessions of May.
• However, this overseas selling has been offset by continuous buying from Domestic Institutional Investors (DII), reflecting a shift in the market’s driving forces.
• Analysts suggest that DII, whose ownership in the BSE500 universe is at an all-time high, are now the primary drivers of the Indian stock market, a shift from the previous dominance of FII.

Amid sustained foreign capital outflows, the Indian stock market is under pressure. However, Domestic Institutional Investors (DII) continue to buy, offsetting the selling by Foreign Institutional Investors (FII). This article explores this shift in market dynamics and its implications.

Shift in Market Dynamics

During 2009 – 2014, FII played a crucial role in India’s markets, largely due to quantitative easing measures in Developed Economies. This period saw a net infusion of $110 billion from FII versus $12 billion selling from DIIs. However, with the tapering off of quantitative easing, DII have stepped up as the primary players, channeling $114 billion into the markets compared to $47 billion from FII during CY 2015- 2023, according to a report by Elara Capital.

Role of Domestic Institutional Investors

Elara Capital notes that $70 billion of DII buying came in the past three years, a move underpinned by a buoyant retail investor participation via the systematic investment plans (SIP) route. The report suggests that the structural transition from savings in physical assets to financial ones has cemented the role of domestic flows as the dominant force in the market. This was reflected in CY22 when, despite geopolitical uncertainty, inflation concerns, and a challenging interest rate environment, FII withdrew $17 billion, and the Nifty corrected by a mere 6%.

Promoter Ownership

Promoter ownership in the BSE500 universe has recently rebounded after initially declining up to CY19, primarily influenced by decreasing government stakes. Real estate still has the highest promoter ownership while the rally in public sector banks (PSB) has pushed up ownership of the government within the BSE500 universe.

DII and FII Activity Trends

Institutional holdings have declined 108 bps from its peak in March 2023 to 37% on the back of sustained selling from FII. Despite seeing inflows of $1.4 billion in Q4FY24, FII share in the BSE500 has fallen 103 bps YoY and 48 bps QoQ to an all-time low of 20.1%. This is partly due to the underperformance of the BFSI space in Q4FY24. However, excluding this, FII share in the listed space has increased by 26 bps QoQ.

Conclusion

The shift in market dynamics from FII to DII dominance has significant implications for the Indian stock market. With DII stepping up as the primary players and the rise in domestic flows, the market is experiencing less volatility. However, the sustained foreign capital outflows continue to exert pressure on the market, making the future outlook uncertain.