FII Activity in F&O & cash

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Foreign Institutional Investors (FII) in India

Who are FIIs? Basic requirements to be considered FII in India.

Foreign Institutional Investors (FIIs) are the organizations that are incorporated or established outside the country they are investing in. FIIs can make their investment proposals on the behalf of the sub-accounts which include foreign companies, investment trusts, partnership firms and individuals.

To be considered FII in India, a particular entity should need to be registered with SEBI and it can invest under PIS (Portfolio Investment Scheme). The investment limit for FIIs taken together with their sub-accounts is 24% of the capital paid up to an Indian Company.

In contrast, the DIIs (Domestic Institutional Investors) are the entities that make investments in the financial assets and securities of the country they belong to.

Importance of FIIs in Indian Stock Markets

FIIs holds a strong position in the Indian market and influence it greatly. There is no doubt that FIIs are the biggest market holder in India that dominate the market by holding significant portion of the free float. This holding is more than the retail holdings, DIIs holdings (which is only 20%) and the share held by the “others” category.

FII Favorite companies in India

There are lots of Indian companies which are preferred by the FIIs to invest in. Infosys, HDFC, HDFC Bank, Asian Paints are some of the darling companies of FIIs.

Do FIIs invest in India for a longer terms or they are only here for a quick money?

In short, you can say that FIIs don’t come with long-term commitment, though it can be possible in a few of the cases. FDI on the other hand is a longer term commitment.

As FIIs bring only foreign capital to India, it can be taken back any time. For an instance, if Warren Buffett’s company buys shares in India, then it can sell the shares back anytime. Thus, FIIs don’t come with lasting commitment, so there always remains the risk of losing capital in the form of FIIs outflows.

FII and the currency risk: Currency Hedging strategies

There is no doubt that the FIIs need to face the currency risks which include foreign and domestic inflation, the risk of interest rate and the exchange rate risks. But, the Reserve Bank of India now has allowed the foreign investors to approach the associated dealer band for hedging the currency risk of their investments. In addition to this, there are some currency hedging strategies that FIIs can use. These strategies are:

  • Hedging Against Downside Risk
  • Bear Put Spread Strategy
  • Buying a Long-Term Put Option
  • Using calendar spread

DO FIIs buy options and future in the derivative markets?

Yes, as the FIIs bring foreign capital to India, they invest in the F & O (Future and option market). FIIs can also write options or short futures, as required by their strategy.

Indian traders and investors keenly analyze FII data published by NSE India after the end of trading hours.

How is India different compared with other Emerging market economies?

The Indian market is different from the other emerging economies because the Indian equity market is more resilient. Though all the currencies have fallen against the most powerful currency- dollar. But, it is the only Indian Rupee that somehow managed to remain stable.

FII investments and Sensex (or Nifty) movement correlation

FIIs influence the Sensex to a great extent. The sensex increases in the case there are positive FIIs’ inflows and it decreases when there are negative inflows of the FIIs. However, according to the Pearson correlation, the sensex movements are affected by FII inflows and there exists a positive correlation between the movement of Sensex and the particular FII entity.