How long can domestic funds support the market?

How long can domestic funds support the market?

Foreign institutional investors, or FIIs, have been net buyers of Indian equities on just one day this month, when on Tuesday they bought stocks worth Rs898.25 crore. On the other eight trading sessions this month, they’re been net sellers to the tune of Rs1,200 crore a day.

In September, out of 21 trading days, FIIs were net buyers on just five days. The most significant buying — some Rs1,132 crore — was seen on 2 September. Market analysts are fairly sure that FII buying will not last long. In fact, they are likely to use every rise in the market to book profits and export money to their home countries where they are facing an intense liquidity crunch. In the September quarter alone, FIIs sold Indian stocks worth Rs22,562.84 crore. Domestic financial institutions, or DFIs, bought stocks worth Rs13,712.52 crore, net of selling, lending support to the market in the same three months.

But how long can DFIs support the market if foreign investors continue to sell Indian securities? This year, so far, FIIs had sold Indian stocks worth Rs89,243.29 crore till 13 October. In dollar terms, they have taken out $10.88 billion (Rs43,909 crore). This is more than 16% of net FII buying of Indian stocks (some $66.3 billion) between 1993 — when the country opened the doors for this class of investors — and 2007. An official of an FII registered in India has an interesting observation to make. If the sale of 16% of what FIIs had bought in the past 15 years can lead to a 45% erosion in Indian markets, from now on every penny that foreign investors withdraw will have a larger impact. In other words, the slump in the Sensex will be much sharper if FIIs continue selling. While nobody denies this, at least theoretically, some local investors are seeing this as a big opportunity. Their point of view is simple: First, FIIs are selling Indian stocks not because there is something terribly wrong with these securities, or the macroeconomic fundamentals of the country. They are selling stocks because there is a problem on their home turf and they need funds. Second, they are not making money by pulling out of India.

In fact, many of them bought stocks when the Sensex was much higher than what it is today. Domestic investors can use this opportunity to raise their holdings in Indian firms. Indeed, they are doing this. Out of the pack of BSE 500 firms, the Indian companies that have the maximum market capitalization, 173 have so far informed BSE on their stockholding pattern in September.

Out of these, 90 have seen a drop in FII holdings. So, Indian investors are replacing foreign investors, buying stock cheap. But it remains to be seen if they can sustain the buying.

Write to us at