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FPI and equity market: A bizarre relation
Shashikant Singh
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FPI and equity market: A bizarre relation

The maiden budget presented by Finance Minister Nirmala Sitharaman proposed a higher surcharge on persons earning more than Rs. 2 crore. It proposes a higher surcharge covering every individual or Hindu undivided family (HUF) or association of persons (AOP) or body of individuals. This will increase the tax incidence on the sale of equity to 21.3 per cent from nearly 18 per cent now for short-term capital gains and to over 14 per cent from nearly 12 per cent for long-term capital gains.

This spooked the market that has yet to stabilise. After July 5, 2019, out of nine trading session, FIIs remained net seller in eight of those sessions. BSE 500, which captures more than 90 per cent of the entire market cap of listed companies, is down by 3.77 per cent in the same period. Even BSE 200 is down by similar per cent that has more of large-cap companies.



So is it market falling due to the selling pressure from FIIs or is it the inherent weakness in the market.

FIIs and Market

To come out with the answer we tried to find the correlation between FIIs inflows and movement of BSE 500, there was no clear cut trend emerging out of it.



The correlation between the daily change in FPIs inflows and change in BSE 500 index did not reveal anything conclusive. For some year it was positive while for other years it was negative. For example, in year 2018 there was a negative correlation between the FIIs daily inflows and daily movement of the BSE 500, while in year 2019 they were moving in the same direction. Moreover, if we take the correlation between BSE 500 and FIIs since 2005, it is -0.003641.

What is visible from the data is that when the market is going up there is weak relation between them, whereas in cases when the market is falling, we find that the relation becomes positive and strong. For example in year 2011 and 2018, when the overall market gave a negative return there was a positive relation between equity return and FIIs inflows. Nonetheless, in the year 2014 and year 2010, when the market was giving positive return, there was a negative relation between them.

The overall analysis of the FIIs inflows and equity market returns does not give any indication about their relation. There may be company-wise relation, but the Indian market has grown big enough and FIIs impact is less compared to earlier.


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