Foreign portfolio investors (FPIs) have been offloading Indian equities heavily of late as concerns over rate hikes, liquidity tapering and geopolitical tensions are keeping the foreign investors cautious.
Data from NSDL shows that FPIs have been taking money out of the Indian financial market since October 2021. In fact, in the financial year 2021-2022 so far, FPIs have pulled out ₹76,928 crore from the Indian financial market.
On the other hand, domestic institutional investors (DIIs) have been on a buying spree in the Indian market since March 2021. Brokerage reports show that DIIs have poured in ₹1.82 lakh crore in the Indian financial market in FY22.
Can DIIs save the domestic market?
Historically, it has always been the case that the selling of one is more or less being absorbed by the other. However, it remains a fact that FPIs do impact the mood of the market. Now, the domestic investors are turning into a formidable force and it is unlikely that selling by FPIs will crash the market.
Consider the steep rise in the number of retail investors in India. BSE data shows that the number of registered investors with the exchange has jumped about a whopping 58 percent in the last one year. Such a large number of investors are also mitigating the impact of FPI outflow on the market.
The Indian market has evolved tremendously in the last few years and a complete crash of the market can be devastating. It makes sense that domestic investors provide support to the domestic market and save it from a steep crash-like situation.
G Chokkalingam, Founder, Equinomics Research & Advisory pointed out that DIIs have already saved the market from a major crash.
"FPIs have been selling since October last year and despite that, we are down only 10 percent. This is a massive change compared to the past. In March 2020, Sensex crashed 38 percent when FIIs sold just around $8 billion," Chokkalingam said.
Chokkalingam also highlights the strong inflow of retail investors which is supporting the market. "We took more than 150 years to get an investors base of five crore but it took only two years to add another five crore investors. This strong inflow of investors has avoided the major crash in the market in case of FPI outflow," said Chokkalingam.
Devang Mehta, Head – Equity Advisory, Centrum Wealth pointed out that there is a clear shift from physical to financial assets in India in the last half a decade. Money has started to flow towards equity as an asset class, be it through SIPs in mutual funds or buying stocks directly.
"Mutual funds, insurance companies, ETFs, HNI’s, retail, family offices together are now a dominant force to provide cushion to the markets in case of heavy selling from foreign investors which we are experiencing right now. Had this been the case a few years back, we would have fallen more with high intensity as well," Mehta said.
"Locally, year to date, foreign investors have pulled out more than 60,000 crore from equities in India. It is equally noteworthy that domestic money has tried hard to absorb these flows and domestic institutions have bought approximately ₹50,000 crore into the markets so far. Of course, this cannot last eternally and protect the markets in case of global catastrophes, but yes, be it DIIs or Indian HNI & retail, they are now a force to reckon with," Mehta added.
Dhananjay Sinha, MD & Chief – Strategist, JM Financial Institutional Securities underscored that Mutual funds had seen a revival in flows in the recent months, so they have the buying capacity.
"If FIIs are selling there has to be a buy side, it is the DIIs now. The risk is that if domestic liquidity narrows as a fall out of FII outflows and slowing money supply," said Sinha.
