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On 4 April, finance minister Nirmala Sitharaman hailed Indian retail investors for investing large sums of money in Indian stocks, thereby cushioning the markets from external shocks. This was in response to a question in Parliament on the flight of foreign institutional investors (FIIs) in the backdrop of a war in Ukraine and a hike in interest rates by central banks worldwide. Greater buying of Indian stocks by retail investors is partly offsetting such sales, though this carries its own risks and vulnerabilities.

As of December 2021, the latest month with official data available, retail investors owned 9.7% of companies listed on the National Stock Exchange (NSE), a 14-year high. In December 2019, this was 8.4%, and has crept up steadily since. Of the eight categories of investors, private Indian promoters and retail investors are the significant gainers in ownership share. FIIs, the second-largest, have seen the largest drop in share, along with the government. The December 2021 FII share of 19.7% was a nine-year low.

Direct investment by retail investors in Indian equities—as opposed to indirectly through mutual funds—has seen a significant increase over the past two years. This has been spurred by people homebound due to the covid-19 pandemic, mobile apps that made share trading easier and rising stock markets. The total number of active demat accounts, which one needs to trade on stock exchanges, has more than doubled between March 2020 and March 2022, and currently stands at 89.7 million. This is likely to have further increased during the LIC IPO.

Risk factors

A market laden with stories has held out the promise of quick gains and stoked interest among retail investors. Since March 2020, the Nifty has appreciated 89%. A significant section of corporate India has delivered higher profits. New businesses have listed, including internet businesses like Zomato and Paytm. A number of these new retail investors have only seen gains. But how will their portfolios perform, and these investors behave, amid growing volatility, as we are seeing now, or even a sliding market?

Retail investors are naturally disadvantaged in market understanding and information flow. This gets amplified in challenging markets. In the March quarter, for example, retail investors saw their shareholding increase in 994 NSE-listed companies, but the average stock returns delivered by this set was (-)7%. Further, the set of 699 companies where retail investors trimmed their shareholding posted average stock gains of 8.9% during the quarter.

Point and counterpoint

For now, the significance of retail investors in the domestic equity market is underscored by the volatility of FII flows into India over the past decade. FIIs are typically hot money flows and are extremely responsive to interest rate differentials between countries. FII inflows in India remained consistently high between 2009-10 and 2014-15. With interest rates in developed economies being very low due to a monetary stimulus following the 2008 financial crisis, investors sought higher returns elsewhere.

However, net FII flows remained muted between 2015-16 and 2019-20, before surging to a record $36.2 billion in 2020-21, as the covid-19 pandemic necessitated a monetary stimulus and a reduction in interest rates. However, the tide turned again in 2021-22 as negative global cues, including rising inflation and consequent monetary tightening by key global central banks, led to a record net outflow of $18 billion. A strong base of domestic retail investors can serve as a counterpoint to the extreme volatility of FIIs.

Sectoral spread

After a three-year hiatus, domestic retail investors turned net buyers in 2020, making net purchases of 51,200 crore on the NSE. In 2021, this increased further to 1.43 trillion. A sector-wise analysis reveals that retail investors are diversified across several sectors. Financials (20.3%), followed by materials (15.3%) and information technology (12.5%), are the top sectors for retail investors. As opposed to the government and FIIs, which have a high exposure to the financial sector (38.5% and 34.8%, respectively), retail investors have a far more even spread.

Over the past two years, retail investors have increased ownership in eight of the 11 sectors studied. This includes those that benefited during the course of the pandemic, such as IT and healthcare, while stakes in financials and energy came down. The current volatility in stock markets will test the resolve of Indian retail investors, and will determine if they are here to stay or not.

www.howindialives.com is a database and search engine for public data

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