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Impact of Exits of Foreign Institutional Investors’ (FIIs) from Indian Markets and response of Domestic Investors

  • November 10, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Impact of Exits of Foreign Institutional Investors’ (FIIs) from Indian Markets and response of Domestic Investors

Sub: Eco

Sec: External Sector

  • Record FII Outflow in October 2024:
    • October 2024 saw the highest-ever FII outflow, with ₹94,017 crore withdrawn from Indian stock markets.
    • This peak outflow surpassed previous significant FII exits, including:
      • March 2020 – the beginning of the COVID-19 pandemic.
      • June 2022 and March 2022, which also recorded substantial FII exits but were notably lower than October 2024.
  • Short-Term Volatility in Indian Stock Markets:
    • The massive FII exit has contributed to increased short-term volatility.
    • Experts caution that volatility may persist in the near term if FII outflows continue.
  • Domestic Institutional Investors (DIIs) as Market Stabilizers:
    • DIIs, including mutual funds, insurance companies, and pension funds, have continued to buy Indian equities, offsetting FII sales.
    • In October, DIIs invested around ₹1 lakh crore in Indian stocks, helping to stabilize the market amidst FII outflows.
    • This consistent DII buying is driven by confidence in India’s medium-term growth potential.
  • Global Factors Influencing FII Exits:
    • The FII sell-off is largely driven by global economic factors, including:
      • Rising U.S. bond yields, which present attractive investment alternatives for FIIs.
      • China’s recent economic stimulus measures, such as reduced reserve requirements, lower mortgage rates, and easier borrowing access for institutional investors, making Chinese markets more appealing.
      • Political uncertainties in the U.S., particularly with the upcoming elections, adding an element of risk for FIIs.
  • Sectoral Analysis of FII Outflows:
    • FIIs reduced investments in several sectors, signalling weakening trends:
      • Construction materials, automobiles, IT, oil & gas, consumable fuels, and textiles experienced significant FII outflows.
      • In contrast, DIIs saw the current market correction as an opportunity to buy quality stocks at lower prices.
  • Divergence in Investment Sentiments Between FIIs and DIIs:
    • FIIs, characterized as opportunistic investors, often seek quick returns and react to global factors.
    • DIIs, including domestic mutual funds, insurance firms, and pension funds (e.g., EPFO, National Pension System), display confidence in India’s growth story and remain long-term investors.
    • DIIs’ purchases are largely supported by systematic investment plans (SIPs) averaging ₹15,000 crore per month, which provide steady capital inflows into the market.
  • Future Outlook:
    • Analysts believe that domestic investors and pension funds will play a crucial role in offsetting FII outflows in the medium term.
    • Although short-term volatility may continue, DIIs’ steady investments suggest that Indian markets could stabilize, driven by structural DII investments in retirement assets and systematic investments.

Background on Climate Finance Targets:

  • COP15 Copenhagen Agreement (2009):
    • Developed countries committed to collectively mobilize $100 billion per year by 2020 to support developing countries in climate adaptation.
    • However, there was ambiguity in defining what constitutes climate finance, with differing views on whether clean energy investments or existing economic development funds should be included.
  • OECD’s Claim (2022):
    • The Organisation for Economic Cooperation and Development claimed that the $100 billion target had been achieved.

New Collective Quantified Goal (NCQG) on Climate Finance:

  • Need for a New Target:
    • At COP26 (2021), it was agreed that more funding is required to meet Paris Agreement goals:
      • Reduce global emissions by 45% by 2030.
      • Keep global temperature rise below 2°C compared to pre-industrial levels.
    • Since 2022, discussions have been ongoing to establish a new target, known as the NCQG, to be set by 2025.
  • Current Debates on NCQG:
    • Proposed targets range from $1 trillion to $1.5 trillion with a commitment period until 2035.
    • The only consensus so far is that the NCQG must build upon the existing $100 billion as a minimum baseline.
  • Purpose of NCQG:
    • To establish a new climate finance target beyond the current $100 billion annual goal
    • Aims to better reflect developing countries’ needs and priorities
    • Intended to support climate action in developing countries
  • Key Features of NCQG:
    • Focus on both mitigation and adaptation
    • Consideration of loss and damage funding
    • Emphasis on quality and accessibility of finance
    • Inclusion of various financial sources (public, private, bilateral, multilateral)

Concerns Raised by India:

  • India’s Perspective on Financing:
    • Open to diverse forms of climate finance, including:
      • Grants.
      • Concessional loans from multilateral banks.
      • Investments in technology.
    • Opposition to classifying business-as-usual investments as climate finance.
    • Resistance against attempts to include developing countries like India and China under new categories such as “major economies” for NCQG contributions.
  • Key Official’s View:
    • Progress is unlikely if climate finance focuses on short-term profit motives or includes countries outside the Paris Agreement’s scope.
economy Impact of Exits of Foreign Institutional Investors' (FIIs) from Indian Markets and response of Domestic Investors

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