Points to Remember:
- FPI investments in India during 2022-23.
- Impact of global factors on FPI flows.
- Role of Domestic Institutional Investors (DIIs) in Indian equity markets.
- Understanding custodial holdings vs. net inflows/outflows.
Introduction:
Foreign Portfolio Investors (FPIs) play a significant role in Indian equity markets. Their investment decisions are influenced by global macroeconomic factors, interest rate differentials, and geopolitical events. 2022-23 witnessed a complex interplay of these factors, leading to both inflows and outflows of FPI investments. The question requires analyzing two statements concerning FPI performance and the role of Domestic Institutional Investors (DIIs) during this period. Determining the accuracy of these statements necessitates examining the data on FPI custodial holdings and the behavior of Indian equity markets.
Body:
Statement (I): The custodial holdings of FPIs, reflecting the total market value of the holdings, witnessed an increase despite the outflows driven by global factors.
This statement requires a nuanced understanding of FPI investment. While net outflows might have occurred due to global factors like rising interest rates in developed economies (making dollar-denominated assets more attractive), the market value of existing FPI holdings could still increase if the Indian equity market itself appreciated. This means that even if FPIs sold some shares, the value of their remaining holdings could rise due to overall market growth. Therefore, an increase in custodial holdings doesn’t necessarily contradict net outflows. This scenario is plausible given the relatively strong performance of some sectors in the Indian economy during 2022-23. Data from the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL) on FPI custodial holdings would be crucial to verify this statement.
Statement (II): Indian equity markets have been relatively less susceptible to large-scale corrections due to investments by Domestic Institutional Investors (DIIs).
This statement highlights the role of DIIs in mitigating the impact of FPI outflows. While FPIs were net sellers in certain periods of 2022-23, DIIs, comprising mutual funds, insurance companies, and others, were significant buyers, providing support to the market and preventing sharp corrections. This counterbalancing effect helped stabilize the market. However, it’s crucial to acknowledge that the Indian market wasn’t entirely immune to global headwinds. While DIIs played a crucial role, other factors like the resilience of the Indian economy and government policies also contributed to market stability. Data on DII investments and market indices during 2022-23 would be necessary to assess the validity of this statement. Reports from financial institutions like the SEBI (Securities and Exchange Board of India) would provide valuable insights.
Conclusion:
Based on the analysis, Statement (I) is likely correct. An increase in the market value of FPI custodial holdings is possible even with net outflows, given market appreciation. Statement (II) is also likely correct, as DIIs played a significant role in supporting the Indian equity market during FPI outflows, thereby mitigating large-scale corrections. However, definitive confirmation requires accessing and analyzing the relevant data from official sources. Therefore, the most likely answer is (C) Both (I) and (II).
Going forward, it’s crucial to maintain a balanced approach to attracting both FPI and DII investments. Policies that promote long-term investment, transparency, and a stable macroeconomic environment are essential. This will ensure the resilience of the Indian equity market and contribute to its sustainable growth, aligning with the broader goals of economic development and financial stability. Further research and analysis of official data are recommended for a more conclusive assessment.
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