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Graphic by Paras Jain/Mint
Graphic by Paras Jain/Mint

Domestic institutional investors inflows in equities hit record high in September quarter

Domestic investors pump Rs41,500 crore into markets, but FIIs sell $3.2 billion of stocks

Domestic institutional investors (DIIs) invested a record Rs41,507.41 crore in the three months ended September, their highest quarterly purchase of local stocks. However, a lack of interest from foreign institutional investors (FIIs), who sold $3.2 billion in Indian equities in the quarter on concerns of flagging economic growth and an elusive corporate earnings recovery, meant that BSE’s 30-share Sensex ended the quarter with a 1.17% gain. This missing participation from foreign investors may limit gains in the next quarter as well, said analysts.

On Friday, the Sensex closed at 31,283.72 points, after shedding 2% in the week. Similarly, the 50-stock Nifty closed at 9,788.60 points after losing 1.76%.

These losses would have been higher but for continued support from local mutual funds and insurance companies. The Rs41,507.41 crore investment in the September quarter was the result of increasing amounts of household wealth flowing into equities, but it was above trend, said analysts.

Mahesh Nanadurkar, India strategist, CLSA India Pvt. Ltd, said that the inflows in recent months were above trend and hence unsustainable, but the channelling of household savings into equities will continue.

“…generally speaking, higher proportion of household deposits going into equities will continue," Nandurkar said in a phone interview.

Nilesh Shah, managing director of Kotak Mahindra Asset Management Co., was also optimistic on flows into mutual funds.

“From a flows perspective, we remain positive. A drop in fixed income rates and real estate prices have attracted investors to equities as the long-term story holds good," he added.

Foreigners, though, might be absent from the scene until concrete signs of an earnings recovery are visible.

“The low FII interest over the last few quarters will probably persist for the next few months as well. The FII interest is likely to come back, when we get reasonably good visibility on the earnings recovery," said Nandurkar. “They are not willing to invest based on hopes."

For the December quarter, CLSA expects benchmark indices to be little changed from current levels.

One key reason for this caution is, of course, stretched valuations. The Sensex traded at 17.90 times one-year forward earnings, compared to its five-year average of 15.26 times.

“Valuations are expensive; people will wait for earnings for more clarity," said Shah of Kotak.

Nandurkar pointed to the “disconnect " between valuations and corporate performance.

The much-anticipated earnings growth may be farther than earlier perceived. The introduction of the goods and services tax has led to a short-term impact on businesses, and private investment demand is yet to see a pick-up.

All is not well on the economic front either.

Economic growth in Asia’s third-largest economy decelerated to a three-year low of 5.7% in the June quarter from 6.1% in the preceding three months. The current account deficit hit a four-year high in the same quarter at 2.4% of gross domestic product.

In the September quarter, the BSE Metals index, BSE Oil & Gas index and BSE Energy index were the key gainers, climbing 19.25%, 12.42% and 11.89%, respectively.

The key losers were the BSE FMCG index, BSE Healthcare index and BSE Power index, which shed 6.29%, 4.95% and 0.87%, respectively.

Nineteen of the 30 Sensex stocks logged gains in the quarter. Tata Steel Ltd, Reliance Industries Ltd and Bajaj Auto Ltd gained the most. They rose 19.60%, 13.33% and 11.27%, respectively.

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