DOMESTIC INVESTORS BUYS INDIA’S GROWTH STORY

The raging fire in Every Indian soul is calling out for long awaited Aatmanirbhar BHARAT , then how can Stock Market go untouched with it. But, we arrive to the same question: How can the Indian Stock Market be self reliant?

By not depending on the foreign investors to drive the rally or a bull run. Foreign Investors were looked upon as the drivers of the Indian Stock Market but recently the tables are turning. When the global headwinds became stronger due to various factors like: Shortage of Semi-Conductor Chips and Russia v/s Ukraine War, the foreign investors started loosing faith in the Indian Stock Market and it was our Domestic Investors who stood strong and filled the void.

Lets first understand, Why are FII’s in India and their impact on our stock market?

India is a developing economy, and a developing economy offers more opportunities of growth compared to a matured economy. Thus, the market suits the growth requirements of FIIs.

FIIs play a very important role in any economy. These are the big companies such as investment banks, mutual funds etc, who invest considerable amount of money in the Indian markets. With the buying of securities by these big players, markets trend to move upward and vice-versa. They exert strong influence on the total inflows coming into the economy.

Foreign investors own nearly a fifth of the shares of listed companies on the National Stock Exchange and have more than a 40 per cent hold in the free-float of the stock market — the highest among investor cohorts.

What’s changed the market in 2021?

The FIIs sold almost Rs. 44,000 crores of shares in the secondary market in 2021, but it left no dent on the stock market. Instead, the benchmark indices were up 23%, while midcap and smallcap indices are up 44 per cent and 53 per cent, respectively.

You might be thinking, How’s this possible?

Enter the little guys, while the stock market have been abandoning the stock markets, the retail investors are entering the hoards. Covid-19 forced people into having smartphones and easy access to internet which benefited the market. Armed ease to operate mobile, astonishing broking services, retails investors count plunged to more than twice in 2021. Dematerialised accounts at the two primary depositories – CDSL and NSDL – were at 77.7 million at the end of November from around 40 million in March 2021. The number has risen nearly four-fold from the 21.2 million accounts in February 2020Apart from direct equity investment, indirect investments through Mutual Funds increased more than 2 folds since 2020.

We can see how Retail Investors are increasing their participation in the stock market by the number of Demat accounts being added in the recent times.

This indirect investment helped mutual funds (MFs) companies to increase their stake in the elite Nifty 50 universe to 8.5 per cent- the highest level in two decades in December 2021, thus reducing the importance if FPI as the price setters.

Sell-off of 2022

The FPI selling has been brutal since October last year. During the nine-month period since October, the investors net sold equities worth Rs 2.56 trillion which was tackled by DIIs and individual investors. This tide of sell-off turned in July as foreign investors turned net buyers, investing Rs 5,000 crore in Indian market.

How’s market still sustaining even after such a massive sell-off?

The recent sell-offs have been backed by the DIIs along with retail and high net-worth individual (HNI) investors. In this time, Domestic Investor’s investment reached an all-time high of 23.53% as of June end.

The share of mutual fund holdings in Indian companies climbed to 7.75% in FY22 from 4.99% in FY17 which can be associated with the massive inflow of retail investors into the equity markets via SIP. Since FY17, SIP contributions have nearly tripled to Rs 1.24 trillion as of FY22.

The SIP’s assets under management (AUM) climbed to Rs 5.76 lakh crore at the end of FY22, growing over 30 per cent annually in the last five years, according to data from Association of Mutual Funds in India. Retail investors total ownership in stocks climbed to 7.42% at the end of FY22 from 6.79% in FY17.

This data shows the increase in AUM of Mutual Funds which is the key reason for inflow of money in the stock market.

Thus, this rising force of the domestic investors have safeguarded the Indian Market from tumbling down.

The rise of domestic investors is also being talked about by policymakers

Recently, while announcing the mega initial public offering of Life Insurance Corporation of India, Tuhin Kanta Pandey, Secretary, Department of Investment and Public Asset Management, said that even as there are concerns in the markets and global sentiments are weak, Indian stock markets are benefitting immensely from domestic flows. “The fact is that while FPIs have withdrawn, domestic investors have filled in,” he had said.

The fact is clearly established that a huge quantum of domestic flows is coming to the market and making it resilient amidst global uncertainties.

At the end, we’ve arrived to the biggest question: Will this trend sustain? And is it a good sign that markets are not too dependent on foreign investors, who were once touted to be the “price setters”?

In case the market sees a correction of 10-15% and instead of jumping back consolidates at the same levels, then it could imply that there’s a slow down of inflow through investors because they are loosing confidence in the recovery and it would eventually lead to a further fall.
FIIs’ shareholding in Indian companies is believed to rise over a period of time, given their relative under-allocation to India. At the same time, domestic investors’ shareholding will continue to remain strong.
So, while it may appear that the flows look sustainable, one would have to wait and watch—as always—to see how the market plays out even as foreign and domestic investors continue to take opposite paths. Till that time, the market remains ‘self-reliant’.