FII Exit from Indian Markets: Beneficial or a Missed Opportunity?

Foreign Institutional Investors (FIIs) play a pivotal role in shaping the dynamics of emerging markets like India. When they sell off significant holdings, it often sparks debates about its impact on the Indian economy and whether this move benefits them. This blog explores the overall FII gain or loss, factoring in net selling, Nifty levels, and INR depreciation, with data spanning from 2021 to 2025. Let's dive into the numbers and scenarios to analyze their strategies and evaluate their potential returns.

FII NET PURCHASES/SALES OVERVIEW- From January 2021 to January 2025, the monthly net FII purchase/sales data reveals substantial volatility. Key trends include:

·        Consistent Selling Pressure: FIIs have largely been net sellers across multiple months, particularly during global market uncertainties.

·        Spike in Outflows: Periods like October 2024 witnessed a significant net outflow of ₹114,445.89 crore, reflecting bearish sentiment toward Indian equities.

·        Brief Inflows: Some months, such as December 2023, saw notable inflows (₹31,959.78 crore), driven by improved market sentiment.

[FII is the Net seller on yearly basis since 2021 (~StockEdge)]

NIFTY 50 PERFORMANCE: The The Nifty 50 index, a barometer of the Indian equity market, has shown remarkable resilience despite FII outflows:

·        January 2021 to January 2025: Nifty 50 grew significantly, surpassing a 100% return mark by mid-2024 before retracing slightly.

·        Bullish Momentum: The rally can be attributed to strong domestic participation, improved corporate earnings, and structural economic reforms.

·        Impact of FII Outflows: Despite large FII sell-offs, the Nifty 50 maintained an upward trajectory, underlining the growing influence of domestic institutional investors (DIIs) and retail participation.

(This graph visually emphasizes the influence of FII activity on the Nifty 50's performance and its divergence from global indices like the S&P 500 since 2021)

INR/USD TRENDS: The Indian Rupee’s value against the US Dollar has steadily depreciated from 72.98 (January 2021) to 85.29 (January 2025):

·        Factors Driving Depreciation: Persistent trade deficits, capital outflows, and strengthening of the USD globally.

·        Impact on FIIs: The depreciation amplifies losses for FIIs exiting Indian equities, as USD-converted returns decline.

(This chart depicts the movement of the Indian Rupee (INR) against the U.S. Dollar (USD) over time, where an upward trend indicates a depreciation of the INR (weaker rupee) relative to the USD)

US MARKETS AS A DESTINATION

·        US Bond Yields: These are now above 4.5%, compared to 1% in 2021. Investing in U.S. bonds gives solid, stable returns in dollars, so there’s no risk of losing money due to currency fluctuations.

·        India’s Challenges: To make it worth the risk, FIIs would need at least a 6.6% return from Indian markets (4.6% from U.S. bonds + 2% to cover rupee depreciation). But the rupee is falling fast, and India’s economy isn’t growing as quickly as expected, making Indian investments less attractive.

That’s why FIIs are exiting Indian markets very quickly—they’re getting better, safer returns in the U.S. without any of the headaches!

OVERALL FII NET LOSS/GAIN, CONSIDERING NIFTY LEVEL AS OF NOW AND INR DEPRECATION-

Let's assume a foreign institutional investor (FII) withdrew ₹92,729 Crores from its investment in Nifty in the year 2021. At that time, the INR/USD exchange rate was 1 USD = ₹73.75.

Investment Scenarios:

Case 1: FII Stayed Invested in Nifty

·        Over the years, Nifty generated avg returns of 20%, 13%, 12%, and 14% in 2021, 2022, 2023, and 2024, respectively.

·        If the FII had stayed invested in Nifty:

·        it will generate the return of 92729*(1.13) *(1.12) *(1.14)) = in USD Term @ 84.35 = $15.64 Billion (Calculated in column F)

Case 2: FII Withdrew and Invested in US 10-Year Bonds

·        The FII converted ₹92,729 Crores into USD at the 2021 Avg exchange rate (₹73.75/USD): $12.57Billion

·        This amount was invested in US 10-Year Bonds, which generated annual yields of 1.52% (2021), 3.73% (2022), 3.88% (2023), and 4.63% (2024).

·        12.57*(1.0373) *(1.0388) *(1.0463) = $14.18Billion (As shown in Column I of the table)

Net Gain/Loss for the FII

For whatever reason FIIs decided to exit from Nifty and assuming they will invest in US 10-year bonds, they have suffered a loss. Had they stayed invested in Nifty, their returns would have grown to Rs134523.86 Crore ($15.64 billion), whereas investing in US bonds only resulted in Rs 121912.15 Crore ($14.18 billion). Net Loss Suffered by FIIs for the year 2021 is Rs 12611.71 Crore (Calculated in Column N) This analysis highlights that exiting Nifty led to a lower return, proving that staying invested in Indian equities would have been a more profitable decision.

CONCLUSION-

The journey of FIIs in India from 2021 to 2025 tells a story of opportunity and caution. While Indian markets delivered impressive growth, the depreciating rupee reminded us of the hidden challenges of investing in emerging markets. It’s a delicate balance for FIIs—chasing growth while managing global risks.

As someone who watches these dynamics closely, I believe India’s potential remains undeniable. Despite short-term volatility, the resilience and growth in sectors like tech and infrastructure are hard to overlook. The decision for FIIs, much like our own investment choices, boils down to a simple truth: balancing ambition with prudence. India, with all its ups and downs, will always hold a unique place in the global investment story.