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

Total Institutional ownership of Indian equities has remained stable at around onethird (~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 freefloat, 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.

Sectoral DII flows: 82% record inflows; top 3 contributes 54% of inflows

* DII inflows in Nifty-500 stood at USD17.1b in 1QFY23. The Top 3 sectors contributing 54% of inflows are: Private Banks (USD3.8b), Technology (USD3.3b), and NBFC (USD2.3b).

* Flows in Insurance, Retail, Utilities, Infrastructure, and Textiles remained weak.

* Key observation over the past few quarters: Unlike FIIs, DIIs recorded strong inflows in Private Banks, Technology, and NBFCs.

* During the last three quarters, DIIs recorded inflows of USD43.5b from Nifty500; of this, Private Banks topped with USD10b, followed by Technology at USD6.7b, and NBFCs at USD5.7b.

Anatomy of FII holdings – USD578b, top 10 stocks account for 46% share

* At a cumulative investment of ~USD191b, the total market value of FII holdings in India stood at USD578b as of Jun’22. The ratio of total market value of FII holdings to cumulative investments of FIIs in India stands at 3x with a bottom of 1.8x in FY13 and a peak of 3.4x in FY22. The peak market value of FII holdings stood at USD677b in FY22.

* Over FY12-22, market value of FII holdings has clocked a CAGR of 11.5% in USD terms and 16.5% in INR terms.

* Sector-wise holdings: Nifty-50 stocks form 70% of total FII holdings in India while Nifty-500 accounts for 98% share. As of Jun’22 and on a sectoral basis, Private Banks (at USD116b) accounted for 20.1% of the USD578b market value of FII holdings. Oil & Gas (13.1% of the holdings) was second with USD76b (Reliance at 78.3% of total O&G holdings of FIIs), followed by Technology (11.7%) with USD67b. Consumer and Automobiles accounted for 7.3%, and 5.7% of holdings, respectively. Including NBFCs (10.3%), Insurance (1.9%) and PSU Banks (1.2% - with SBI at 1%), Financials formed 33.6% of FII holdings in India. Cumulatively, these five sectors – BFSI, O&G, IT, Consumer, and Auto – contributed 71.4% to the total FII holdings in India.

Anatomy of DII holdings – USD448b, top 10 stocks account for 38% share

*The total value of DII holdings in India stood at USD448b as of Jun’22. Nifty formed two-thirds of these holdings, while Nifty-500 accounted for 97% share.

* Sector-wise holdings: On a sectoral basis, at USD68b, Private Banks accounted for 15.2% of this USD448b market value of DII holdings as of Jun’22. Including NBFCs (7.1%), PSU Banks (3.7%) and Insurance (1.4%), Financials formed 27.4% of DII holdings in India. Oil & Gas was second with USD48b, followed by Technology at USD44b, Consumer at USD44b (ITC alone accounted for 43% of the holding), and Automobiles at USD32b. Cumulatively, these five sectors contributed 64.8% to the total DII holdings in India.

FII flows: Led the charge until FY15; petered out subsequently

* In our detailed analysis of Institutional flows over the last 15 years, we see contrasting trends 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 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 1.3% in CY22YTD that underscores its resilience.

* 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.

* Notably, FIIs’ trailing 12-month cumulative outflows were at the highest level as of Jul’22 at USD30.3b, way above the outflows of USD12.2b during GFC crisis. However, the recent inflows from FIIs in Aug’22 have brought down the cumulative outflows to USD25.8b. FIIs have also surpassed the longest stretch of selling since GFC, over the same period.

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