There have been many instances of domestic institutional investors pouring money into stock markets at a time when FIIs are rushing for the exit. A unique Moneylife study reveals that such startling calls of DIIs have been highly accurate

It is no secret that the fortunes of the Indian stock markets are mostly driven by interest from foreign institutional investors (FIIs), who invest in hordes for a certain duration and are as quick on the trigger when it comes to pulling out of the markets.

As such, Indian stock markets are frequently left at the mercy of the FIIs, who tend to exhibit drastic shifts in behaviour. But does that mean that FIIs take accurate calls on the markets when compared to their domestic counterparts?

Moneylife carried out a study to identify the behaviour patterns of both FIIs and DIIs (domestic institutional investors) at any given point of time between 2 April 2007 and 25 June 2010. The results were startling. We found that, during this period, there have been several instances when domestic investors have poured in money by the buckets into the markets at a time when FII interest was waning dramatically. Has this contrarian behaviour done any good for DIIs?

Our study has shown that there have been 23 instances when DIIs have stepped in to buy when the FIIs were eager to jump the ship. Out of these 23 occasions, the Sensex has posted negative growth 19 times when FIIs were continuously withdrawing from the market, proving their superior firepower. For instance, during the period between 12 May 2010 and 27 May 2010, FIIs were net sellers on each trading day while DIIs turned out to be net buyers on all these days. During this period, the Sensex fell by 3%. The index has registered positive growth only on four occasions in such times. This means that DIIs have been investing in a falling market, trying to take advantage of a reduction in valuations and FIIs were dumping stocks. Has this strategy helped the DIIs? We tried to establish the Sensex performance on the seventh trading date after the last recorded buying by the DIIs. It is interesting to note that out of the 19 occasions when the Sensex has recorded a fall, it has gone on to record a positive jump on 12 occasions after the seventh trading day. The subsequent days brought even more gains.

On many occasions, the patience shown by DIIs has paid rich dividends for them. Between 6 July 2009 and 13 July 2009, when the Sensex shrank by 5% due to FII outflows, it went on to post 11% growth after the seventh trading day, 22 July 2009.

Similarly, between 14 August 2009 and 20 August 2009, the Sensex had fallen by 3%. But by 31 August 2009, the Sensex had gained 4%. Out of the four occasions when the Sensex has actually remained positive during a period of FII outflow, it has continued its positive momentum until the seventh trading day on two occasions. The decline into which DIIs were buying proved short-lived.

So, next time you find a stretch when the FIIs have been selling continuously and DIIs buying you know what to do.

 — Moneylife Digital Team