The net FII investment was positive on 12 of the 21 trading days during the month of May. Of these 12 days, on 9 days the Sensex moved up. Similarly FII investment was negative for 9 days, of which on 7 days Sensex recorded a fall. Presto, there definitely exists some correlation. The correlation co - efficient between FII investment & Sensex is very high at +0.61 and that itself speaks for it. The graph below also shows the same trend except for some days & with a marginal difference in the magnitude. So what exactly is happening?

In India, the individual investors account for the Institutional investors like FIIs, MFs account for 85% of the daily trades and the rest, and pension funds. FIIs fall in the 15% category but market movements in the recent past provide enough proof that FIIs are the market movers in the Indian stock markets.

What actually happens is that the shares in which these FIIs trade, instantly become hot for the day, doesn’t matter whether on the buy side or the sell side. The individual investors generally follow these institutional investors, when they make their investment decisions. They rely on the research and the judgement of these institutional investors.

Of course, that is always not the case. There are other factors also that intervene. One, the large correlation existing between Indian and global financial markets affects the Sensex movements. The Sensex, these days, is more driven by the stocks of the convergence universe. So, the market looks at the Nasdaq movements to take their investment decisions on these stocks. Two, true that the market moves in line with institutional investment, but it also includes the institutional investment made by the Indian institutional investors. It’s not just FIIs.

Nevertheless, FIIs have been the leaders in the past and their importance to the Indian stock markets cannot be ruled out.

 Correlation Co - efficient = 0.61