The performance of stock markets is greatly influenced by Domestic Institutional Investors (DIIs) and Foreign Institutional Investors (FIIs). They constantly buy and sell shares impacting the stock markets’ liquidity and causing price changes and volatility. In order to understand the stock markets, it is important to understand the role of the inflow and outflow of DIIs and FIIs.
The stock markets are most influenced by the buying and selling of DIIs and FIIs. An example is when FIIs buy large quantities of stocks the stock markets will rally strongly. The opposite will happen when FIIs sell large quantities of stocks. The stock market will lose a lot of its value. This is because FIIs have a lot of money to trade in the stock market.
The stock markets are also stabilized by DIIs like mutual funds, pension funds, and insurance companies. They tend to buy heavily when FIIs sell heavily. This blocks extra volatility to the market. The balance of DIIs and FIIs is important to stock market.
The movements of currency have a large impact on the activity of FIIs as well. If the currency of the country is lowering in value, it also causes FIIs to sell and the market becomes more unstable. The value of the currency determines how foreign money will flow into the country, which determines how strong the market will be. Therefore economic stability, International currency value, and FIIs data are very important.
When big institutional players enter or exit the market for the first time, the market response is predictable. Because the big players focus mostly on the large caps, the indices move quickly based on the inflows and outflows. Predictable jumps in volume and open interest mean big players are in the market.
When FIIs invest in derivatives, the volatility of the market suffers. They can dictate the levels of open interest both in the market and in the options, the implied volatility, and the direction of the price. Because of these reasons, market participants are after FII derivatives data in order to anticipate big movements or reversals in the market.
From this, we can infer that FII and DII data is heavily relied upon to determine where the smart money is flowing. FII and DII data is most reliable when it is paired with other known signals or methods of analyzing the market.
For an average holder, the FII and DII data can reduce the level of confidence in the market or increase the level of confidence. End of the day, FII and DII data must be paired with adequate fundamentals to reduce the ambiguity.
Market participants will always try to avoid ambiguity, and this is the reason why FII and DII data will always be considered a valid explanation for the volatility in the market. The data will explain the increase or decrease in liquidity as well as the increase or decrease in the confidence of the market. When paired with other analytical tools, it will influence the market participants to act in a limited manner.
