Does FII exit means fall in share price?

The Indian equity market is falling incessantly in the last one month. It has dropped by 5.71 per cent in the last one month. Among the various reasons that have been ascribed to such fall, one major reason has been selling spree by FIIs. They have sold share worth Rs. 18,265 crore since July 8, 2019. This is the highest selling in one month after they have gone for selling spree in the month of October 2018. Does this mean that selling of FIIs is leading to such a fall? Let us find through statistical analysis.

 
FIIs Daily Flows

Since FIIs have holdings in stocks beyond the top 100 companies by market cap, we consider the movement in BSE 500 to gauge the impact of FIIs in the Indian stock market.

At the market level, the impact is not significant and the correlation coefficient between FIIs inflows and BSE 500 index movement is just 0.05 per cent, which is very negligible. Therefore, the FII selling is playing a very minor role in moving BSE 500. The graph shows how flat the relationship is between the index and FIIs inflows.

Relation Between FIIs Flows and Change in BSE 500

Nonetheless, composition and weightage of the company in the index may have a bearing on such relation. Hence, if a company has major weightage in the index and FIIs are not selling in that company, the correlation coefficient will not reflect the true relation.

Therefore, we checked with the impact of FIIs inflow or outflow from a company and how it impacts its prices. We took the change in market cap of company and change in FIIs holding for the last one year. There the relationship is strong and positive. The correlation coefficient stood at 0.17. Hence, FIIs exit or entry to a company impacts its prices, but not significantly.

Relation Between FIIs Flows and Change in Market Cap of Individual Companies