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How DIIs cushioned the impact of FII outflows when market crashed

Often FIIs or FPIs have been blamed for the sudden crash in Indian markets when they have pulled out money citing greater returns for their investments outside the country. But it's the DIIs which have mostly cushioned the impact of FII selling by investing into equity and debt and minimising the losses to the financial Indian market.

Aseem Thapliyal        Last Updated: February 15, 2018  | 17:53 IST
How DIIs cushioned the impact of FII outflows when market crashed

Every time the market crashed during the last few years, analysts and brokerages came out with their expert comments on factors leading to the debacle.

Amid all market coverage euphoria among media outlets, investors and traders ran for cover shielding their investments and looked for new strategies/guidance to count and minimise their losses.

The crash would be due to domestic or global factors or a mix of both.

But then we forgot to consider those who put a cap/minimised downfall of the market on those days.

We have often accounted for the role of foreign institutional investors (FIIs) and domestic institutional investors (DIIs) in the movement of benchmark indices.

Foreign institutional investors are the institutional investors which undertake investment in securities and other financial assets of the country they are based out of.

Domestic institutional investors are the institutional investors which undertake investment in securities and other financial assets of the country they are based in.

The investors usually comprise banks, mutual funds houses and insurance companies who pour in money expecting to reap huge returns from their investments.

Often FIIs or FPIs have been blamed for the sudden crash in Indian markets when they have pulled out money citing greater returns for their investments outside the country. But it's the DIIs which have mostly cushioned the impact of FII selling by investing into equity and debt and minimising the losses to the financial Indian market. We look at how DIIs have proved to saviours in the Indian financial markets when Sensex and Nifty saw sudden outflows on FIIs exiting the market.

On February 6, when the Sensex crashed 1,275 points and Nifty fell over 300 points intra day, FIIs pulled out Rs 2,326 crore from the Indian market. The sudden outflow of funds would have severely dented market sentiment if DIIs would not have come to the rescue. On the same day, DIIs brought in Rs 1,699 crore, an increase of Rs 536 crore in inflows from the earlier day thus cushioning the impact of funds outflow.

The DIIs again came to the rescue of Indian market when the Sensex closed 113 points lower to 34,082 level on February 7 after RBI kept key policy rates unchanged.  While FIIs pulled out Rs 1,022 crore, DIIs pumped in Rs 461 crore into the market.

Even when the market ended a seven-day losing streak on February 8, 2018 with Sensex and Nifty closing 330 points and 100 points, respectively, FIIs withdrew Rs 2,279 crore from Indian market in search of better avenues. The shock to the financial market would have been larger if DIIs would not have chipped in with Rs 2,373 crore funding on the same day.

Looking at the larger picture, FIIs pulled out Rs 7,754 crore in February after the Modi government announced a 10% LTCG tax in its last full-time Budget on February 1 before Lok Sabha polls and surging US yields lured FIIs to park their funds in the bonds of the world's largest economy. The outflow was negated by DII investment worth Rs 6,609 crore till February 14, 2018.  In January 2018, FIIs had become net buyers of securities for the first time in six months pumping Rs 9,568 crore funds into the Indian market.

In a note, Himanshu Srivastava, Senior Research Analyst, Manager Research at Morningstar Investment Adviser India said: "In the year 2017, DIIs were net sellers in Indian equities only in the month of March; barring that, they remained net buyers in other months. In fact, they bought into Indian equities whenever FIIs were net sellers - for instance in the months of January, August, September and December of 2017. This I believe is a first step towards a matured Indian equity markets."

Meanwhile, coming back to the market fall, the indices fell their most in January 2008 reacting to the US recession which sent shockwaves across markets worldwide.

In January 2008, FIIs withdrew Rs 29,447 crore from capital markets but DIIs infused Rs 16,414 crore, thus minimising the impact of the fund outflows.

During this month, the market tanked the most on account of global crisis. Let's see how DIIs came to the rescue of capital market yet again.  

The Sensex saw its highest ever loss of 1,408 points at the end of the session on January 21, 2008 as investors panicked following weak global cues amid fears of the US recession. DIIs came to the rescue of Indian capital market after they pumped Rs 3,399 crore compared to Rs 3,296 crore withdrawal on the same day.

On the very next day, the Sensex saw its biggest intra-day fall when it hit a low of 15,332, down 2,273 points. However, it recovered losses and closed at a loss of 875 points at 16,730. The Nifty closed at 4,899 falling 310 points. FIIs withdrew Rs 4,265 crore in funds from Indian capital market accompanied by DIIs which pumped Rs 2,778 crore into Indian capital market.

"The increasing participation of DIIs compared to FIIs, reduces the dependence on foreign money giving much needed stability to the markets which is desirable. In addition to that, not only Indian managers, but also investors have started seeing market corrections as an investment opportunity and they try to make the most of it by continuing their investments, which is an ideal scenario," Srivastava's note added.

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