If you believe that it is the might of institutional money that moves the stock markets, consider this: Despite a net investment of Rs 32 crore on the BSE and Rs 10.75 crore on the NSE by institutional investors on July 30, the Sensex fell by 7.83 points and the S&P CNX Nifty closed 5.15 points lower. On July 16, when the net institutional investment was a negative Rs 14 crore on the NSE and a negative Rs 10 crore on the BSE, the S&P CNX Nifty rose by 32.55 points and the Sensex by 122.95 points.

The above observations are not aberrations -- market data for July show that there is little correlation between institutional inflows and market indices. Less than 0.5 per cent of the movement in the S&P CNX Nifty is explained by the variation in net institutional investment onthe NSE, and though 1.25 per cent of the movement in the Sensex is explained by variation in the net institutional investment on the BSE, the correlation is negative. The two indices -- BSE Sensex and S&P CNX Nifty -- however, show a very high degree of positive correlation.

When the net institutional investments are broken into net investments by domestic financial institutions and foreign institutional investors, it is observed that while there is a positive correlation between net inflows by FIIs and the movement in the two indices, net investments by domestic institutions and the movement in the indices are negatively correlated. Though these correlations cannot be said to be significant, they help to some extent in bringing to light certain interesting trends.

The positive correlation between net investments by FIIs and the movement in the market indices could indicate any of the following. One, foreign institutional investments lead to a rise in market indices and their withdrawal causes markets tofall. Two, FIIs generally invest in a rising market and disinvest when the market begins to fall.

Similarly, the negative correlation between the net investments by domestic institutions and the movement in market indices could indicate either that investments by these institutions cause the markets to fall and their disinvestment causes a rally, or that domestic institutions invest in a falling market and disinvest during a rally.

However, of the above possibilities what is likely is that by and large, FIIs see a profit potential in a rising market and therefore make their investments at that time and they disinvest when the market begins to fall to cut losses. Had they been capable of moving the markets, the S&P CNX Nifty would not have fallen on July 30 despite a Rs 8.34-crore net FII investment. And the same index would not have risen on July 16 despite a net disinvestment of Rs 9.83 crore by FIIs.

Domestic institutions, on the other hand, invest in a falling market probably because they believethat stocks are available at bargain prices at such a time and take advantage of a rally to book profits. This could, of course, also indicate that institutions such as UTI pump in huge amounts of money in falling markets in a bid to curtail the fall under directions from the finance ministry.

Though these conclusions cannot be made with great confidence considering the low degree of correlation between the net institutional investments and the movement in the market indices, it is clearly evident that it is not the weight of institutional money which moves the stock markets. At the same time, since small investors are absent from the market currently, it can be concluded that it is speculation by traders which causes most of the market movements.