Why did stock prices drop even though massive net sales by FIIs, or an en masse flight by FIIs from the country, did not happen? Stock prices are determined by the beliefs of lakhs of market participants across the country. These are the people who are watching industries, individual companies and making forecasts about the future performance of the companies. Some foreign investors participate in this kind of active stock speculation, but the bulk of it is done by domestic individuals. When global business cycle conditions became worse, these speculators started downgrading their optimism about the growth of profits and dividends on the part of Indian companies. This gave lower stock prices. The channel runs from news to forecasts to (primarily domstic and individual) speculators to stock prices.
Why does the media talk so much about FIIs even though their influence on stock prices is small? From the viewpoint of brokerage firms, what matters most is trading volume, because their fees are proportional to volume. Whether FIIs buy or sell, they generate fees for brokerage firms. FIIs tend to do business with a few large brokerage firms located in South Bombay who are focused on institutional investors. For these firms, FIIs are important customers. Journalists and television commentators tend to talk with a few big brokerage firms, and tend to think that FIIs are very important. They miss out on the thousands of stock brokers spread across the country, doing mostly retail business, who account for the bulk of activity on the stock market. The belief of the big institutionally oriented brokerage firms in Bombay, that FIIs are very important for their business, has got rubbed off into a broadly held belief in the media that FIIs are the most important participants in Indian financial markets.
Curtsey of Financial Express