What Is FII? Why Are They Selling And What Can Reverse The Course? Know Everything Here
What Is An FII?
Foreign Institutional Investor (FII) is an investment fund or an investor investing in a country outside the one in which it is registered. The term FII is commonly used in many countries, including India, where it refers to the outside equities investing in the country’s financial markets.
The FII can encompass hedge funds, pension funds, insurance companies, mutual funds, and investment banks. In developing economies, FIIs prove to be an essential source of capital. However, many developing economies like India have put limits on the complete value of assets an FII can invest in and the number of equity shares it can purchase, particularly in a single company.
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The Reasons Behind The Substantial Sellout By FII
The FIIs are selling because of a myriad of measures taken by the central banks including the Bank of England, the US Federal Reserve, and more to tighten liquidity, while also strengthening the dollar, and raising inflation.
Till now, central banks had been providing capital into the system by means of purchasing bonds from financial institutions and commercial banks.
This aided in keeping the interest rates low. With central banks decreasing such bond purchases, there is not much liquidity in the system, and the interest rates commence to rise. This compels many investors to pull money out of assets like the emerging markets that prove to be risky and rather put them in treasury bonds of developed markets.
Additionally, inflation is not good news to celebrate as the central banks react by increasing interest rates. An increase in the interest rates means a shrinking of company profits. This makes investors no longer wish to pay huge valuations and thus they commence pulling out money.
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Can Domestic Inflows Offset This?
Yes. Domestic inflows are strong enough to offset this. However, the FII selling in heavyweight stocks can kickstart a vicious cycle and hurt sentiment. When prices fall dramatically, it creates fear among people, making them sell out more in the anticipation of a further decline in prices.
Can Rupee Influence FII’s Decision In Favor Of Investing In Indian Equities?
FIIs bring dollars, turn them into rupees and invest in Indian shares. The rupee is a depreciating asset, but this fact does not bother them as far as the equities offer strong returns. Now the important point to note here is that while taking out money, the FIIs would have to convert rupees into dollars. Thus, a weak rupee results in obtaining just a few dollars.
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How Can This Cycle Of FII Selling Be Reversed?
The ball now lies in the court of the US Federal Reserve. If the US Federal Reserve decided not to hike rates as much as previously planned as a result of the current market volatility, it could be a breath of relief for the equities.