Mumbai: Indian mutual funds and insurance firms, which scooped up shares while foreign institutional investors (FIIs) stayed away, turned net sellers of ₹10,247.9 crore in March, even as FIIs returned to Indian markets. The selling, the worst in 36 months, may be an attempt by domestic institutional investors (DIIs) to raise cash, expecting volatility ahead of Lok Sabha elections 2019, analysts said. The general election will be held from 11 April to 19 May and votes will be counted on 23 May.
The change seems to be triggered by tensions arising out of an escalation in hostilities between India and Pakistan, but the selling did not subside despite easing of geopolitical tensions, said Deepak Jasani, head of retail research at HDFC Securities Ltd. Domestic institutional investors (DIIs) could be booking profits and reshuffling portfolio ahead of the fiscal end, he said. “As volatility is expected to rise, DIIs may be slashing equity exposure wherever possible and raising some cash," Jasani added.
“Given the recent rise in markets, insurance companies that support the markets at the time of serious correction, are booking profits. Profit booking is just a part of routine business; one should not read too much into it," said Arun Thukral, managing director and CEO, Axis Securities Ltd. Year to date, DIIs have sold Indian equities worth ₹8,666.92 crore. Data shows DIIs were net buyers only in January ( ₹2,146.87 crore) while they sold ₹565.89 crore in February.
Dhananjay Sinha, head of research, economist and strategist at Emkay Global Financial Services sees two reasons for the DII selloff. “First, there has been a moderation in retail flows, specially the discretionary money, as reflected in the monthly mutual fund data. Second, there has been some supporting buying from the FII segment, resulting in rise in valuation specially in the broader markets, thereby creating selling opportunity for domestic investors," he said.
According to data by Association of Mutual Funds in India (AMFI), net flows into equities, including those linked to savings scheme funds, fell to ₹5,122 crore in February after hitting a 24-month low of ₹6,158 crore in January.
Meanwhile, foreign investors have returned, making analysts confident that FII-led liquidity will drive markets. FIIs have bought $2.43 billion in stocks in March so far, their biggest purchase since November 2017.
“FIIs turned net buyers since mid-February 2019 largely because of the change in view on global liquidity resulting from the shift in stance of US Federal Reserve on monetary policy outlook and follow-up by European Central Bank (ECB). Last year saw sustained FII outflows largely due to strengthening view on global policy rate normalization. This year, the scenario has changed due to sharp decline in world trade volume, largely attributable to the ongoing US-China trade conflict. In the near term, FII flows into India look positive," said Sinha.
Thukral agrees that the moves by the US Fed and ECB has amplified banking system liquidity, favouring risky assets like equities, prompting FIIs to invest in India. “If the elections throw up a possible verdict in the form of a stable government, we expect the FII buying to continue," Thukral said.
Indian markets, which trailed global peers in the first two months of 2019, finally caught up in March, as investors bet on a stable government coming to power after the general elections. Local stocks missed the global rally in the early part of the year that followed the US central bank pausing interest rate hikes and easing trade war tensions.
In local currency terms, benchmark indices Sensex and Nifty rose over 5% in this year so far. In dollar terms, both the Sensex and the Nifty have jumped over 7% each in 2019 so far while MSCI Emerging Markets index and MSCI World index are up over 8% and 11%, respectively.