FII return with Rs 46K cr buying spree; likely prefer largecaps vs broader market stocks. Here's why

Economic Times

13-05-2025

Foreign institutional investors (FIIs) infused nearly Rs 46,400 crore into Indian equities since April 15, extending their shopping spree to 17 out of the last 18 sessions, with a significant portion of these flows likely directed towards large-cap stocks. This trend highlights a growing preference among overseas institutions for quality and stability amid prevailing global uncertainties.
ADVERTISEMENT With India-Pakistan ceasefire and a tariff truce between the US and China, where both countries have agreed to significantly ease their tit-for-tat tariffs for a 90-day period, a calm is expected to return in global markets. On Monday, both Indian and US markets ended with strong gains.
FIIs broke their 16-session buying streak on Friday, offloading shares worth Rs 3,799 crore as tensions between India and Pakistan flared up. But on Saturday, both countries agreed to a ceasefire.
Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, said that he is observing a clear re-risking by FIIs in May 2025, with initial capital allocations favouring large-cap names, particularly in sectors like private banking, capital goods, and high-beta infrastructure plays.'We see the current phase of FII flows as quality-led and conviction-driven and not a blanket chase of momentum. Largecaps remain the primary beneficiaries, with midcaps following through in pockets where the growth narrative is backed by numbers,' Sharma said.In his view, a targeted participation in midcaps is being seen and only where there's a strong earnings delta or sectoral tailwind, like in defence, renewables, and manufacturing clusters with PLI exposure, stand out.
ADVERTISEMENT Corroborating this view, Geojit Investments' VK Vijayakumar said that there is a big shift in market preference in favour of largecaps, away from overvalued segments of mid and smallcaps is significant. FIIs are mainly buying largecaps, and this trend can continue, he opined."The ceasefire between India and Pakistan has paved the way for a sharp rally in the market. The prime mover of the rally will be the FII buying, which has been sustained for sixteen continuous days, except last Friday when the conflict escalated. Domestic macros like expectations of high GDP growth and revival of earnings growth in FY26 and declining inflation and interest rates augur well for the resumption of a rally in the market,' Vijayakumar said.
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The trend reversed following a three-month pause announced by Donald Trump. A fortnightly data on FII action by NSDL for the period between April 16 and 31, shows that the highest FII inflows went to the financial services sector at Rs 17,585 crore. Sectors that followed were telecommunication (Rs 3,413 crore), healthcare (Rs 2,138 crore), power (Rs 1,627 crore) and capital goods (Rs 1,613 crore). FIIs have also bought shares in the auto & auto components sector, metals & mining, chemicals, construction and realty, among others.
ADVERTISEMENT In Vijayakumar's view, FIIs are preferring stocks like ICICI Bank, HDFC Bank, Bajaj Finance, Reliance Industries (RIL), Larsen & Toubro (L&T), Bharti Airtel, Ultratech, Mahindra & Mahindra (M&M) and Eicher Motors, and they are likely to lead the rally. At the peak of FII selling between January and March, when foreign investors sold shares worth Rs 116,574 crore, there were 11 Nifty 50 stocks in which the FIIs added stakes. These stocks include Hindalco Industries, ICICI Bank, IndusInd Bank, JSW Steel, Kotak Mahindra Bank, Bajaj Finance, Bajaj Finserv, Bharat Electronics, Bharti Airtel, Shriram Finance and Wipro.
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A report by Motilal Oswal Financial Services (MOFSL) highlights the shift in the domestic equity ownership of FIIs. The FIIs held 18.8% as of March 2025 versus 22.8% in March 2015. At the same time, domestic institutional investors raised their stake to an all-time high of 19.2% in March 2025 versus 10.8% in March 2015.As a proportion of the free float of Nifty-500, FII ownership decreased 190 bps YoY and 30 bps QoQ to 37.3%, while DII ownership increased 220 bps YoY and 110 bps QoQ to 38%.Sharma of Whitespace attributes this shift to the rising domestic participation, expansion of market breadth, the impact of Covid-19, a surge in global interest rates to multi-decade highs, and valuation expansion in the domestic markets. Markets have displayed strong stability for the past month after Trump deferred reciprocal tariffs for three months. Over the past month, the Nifty has delivered a return of 9.2%, closely tracking the Nifty Midcap 100's gain of 9.7% and outperforming the Nifty Smallcap, which rose 6.8%. On a 1-year basis, the headline index has delivered 13% returns, higher than 12% by Nifty Midcap 100 and 4% by Nifty Smallcap 100. Sharma of Whitespace Alpha said that when global volatility subsides and the INR stabilises, institutions tend to first rotate into scalable, liquid opportunities. 'From our market-neutral framework, this has also resulted in noticeable shifts in index futures basis, signalling renewed institutional confidence. In contrast, smallcaps remain more of a retail and domestic mutual fund story at this point, with FIIs staying cautious due to elevated valuations and limited liquidity headroom,' he added.Vijayakumar said midcap IT and digital stocks are other segments to watch.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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