Domestic institutional investors (DIIs) are all set to lead the Indian equity and debt markets, with net investment reaching an all-time high as FIIs pull money out of the economy.

Data collated by VCCircle on FII and DII investments showed that while the current fiscal will be the first time in the last seven years when FII are net sellers in the market, domestic investors with an all-time high net investment of Rs 65,884.3 crore for the first eight months of the fiscal will become net buyers.

While the quantum of inflows from DIIs was half of those of the FIIs in terms of volumes, domestic investors are likely to cover FIIs’ net investment position and even generate a positive flow of Rs 26,000 crore for the markets. The last time they were able to achieve this was during FY2007-08 when the world was reeling under recession.

Why are FIIs pulling out of India?

The Indian markets have been on a roller-coaster ride since the start of the year. The euphoria around the new government along with the promise of world’s fastest growing major economy drew in a lot of investors. But as the Fed rate hike draws closer and safe haven demand picks up, FIIs are pulling money out of the market to invest back into the US economy.

Another reason for the volatility in the markets has been waning investor interest owing to the inability of the government to pass key legislations.

Will DIIs cover position?

While FIIs have been rather jittery for investing in the Indian economy, the DIIs have covered the position for the FIIs. Although the quantum of flows cannot be matched, the markets have remained stable as DIIs have been absorbing sell off by FIIs.

With the Fed expected to hike rates in December, the emerging economies are expected to see what the World Bank describes as the ‘perfect storm’. However, KK Mittal, vice president at investment advisory firm Venus Capital, believes that the situation may not be as bad for India as for other emerging markets.

“FIIs may continue to be net sellers till the time Fed rate is fully absorbed, after which there would be some stabilisation of outflows but inflows may take some time to revive as oil producing countries face pressure and they withdraw money to stabilise their accounts,” Mittal said.

He added that the country may see a further strengthening of DII position as the government implements Seventh Pay Commission’s recommendations and provides a boost to savings which can in turn spur domestic flows.

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