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

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  • October 2024 saw the highest-ever FII outflow, with ₹94,017 crore withdrawn from Indian stock markets.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.