FIIs have stepped back, but the stock market has a new pillar

Mutual funds, insurers and local pension funds have muscled into Indian markets to power a sharp rally since the year's beginning, at a time foreign investors have taken their feet off the pedal. Every time markets fell, these domestic institutional investors (DIIs) have scooped up stocks in a sign of maturing local investors, market experts said, in the backdrop of robust growth in a resilient economy.

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Since the year began, DIIs have ploughed ₹3,01,684 crore into the Indian stock markets till 21 August, up nearly threefold from ₹1,08,887 crore a year earlier. At the same time, foreign institutional investors (FIIs) cut their investments to ₹15,940 crore from ₹1,40,105 crore a year earlier.

The outsized presence of domestic institutions reflects in the continued stock market rally: Since the beginning of the year, Nifty 50 has gained 14%, while MSCI AC Asia Pacific index has risen 9%.

Over the last four years, local investors have viewed every market dip as a buying opportunity, said Manuj Jain, co-head of product strategy at WhiteOak Capital AMC. "Whether it was the covid-related decline in 2020, the volatility from geopolitical tensions in 2022, the fall due to global slowdown worries in 2023, or the recent election result day drop on 4 June, the market has consistently rebounded and reached new all-time highs in a short period," said Jain.

The benchmark Nifty 50 index which stood at 12182.5 points on 1 January, 2020 before the pandemic outbreak, closed at 24823.15 on Friday, a gain of 103.8% during the period. Experts said that corrections no longer alarm retail investors who view them as normal, indicating inflows through systematic investment plans might remain steady.

The two categories of investors leading the DII advance are retail investors and high networth individuals, (HNIs), said Nitin Raheja, executive director of Julius Baer India.

“We do believe that while in the short term, the momentum of flows could see some cooling if the markets were to correct, over the long term, however, these flows will only keep on increasing".

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Jain of WhiteOak AMC too said this momentum “may continue for the time being" in the absence of any major disappointments or significant triggers. “Furthermore, he believes sustained optimism in the market could attract more retail investors, further boosting liquidity."

Stock market setbacks

The pandemic outbreak, war in Ukraine and West Asia and the Lok Sabha election upset have previously set back stock markets, for not for long.

Increasing financialization of savings funnels more flows to equities, said Jay Kothari, global head, international business, DSP Asset Managers. He pointed out that India’s GDP is approximately $4 trillion currently, and remains one of the world's fastest-growing large economies. “So, with around 30% savings rate, India saves around $4 trillion X 30% = $1.2 trillion of savings. Of this, even if 10% gets allocated to equities, (which is not unreasonable), you still could have $120 billion of savings going into equity markets which is meaningful," Kothari added.

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According to Kothari, this could increase over time. The flows are structural in nature and India will keep seeing demand for good quality companies outpace supply, he added.

Another factor behind domestic investors' enthusiasm is favourable earnings outlook for companies across market capitalization.

The Organization for Economic Co-operation and Development (OECD), a rich country club, has projected global growth at 3.1% in 2024 and 3.2% in 2025, whereas India is projected to grow at 6.6%, the fastest among major emerging markets, said Ajay Khandelwal, fund manager at Motilal Oswal AMC. China is projected to grow at 4.9% and Brazil at 1.9%, he added.

Resilience amid challenges

Over the past five-six years, India has shown resilience despite geopolitical and supply chain challenges. Regulatory reforms and a growing middle class, along with key trends like digitization, rising manufacturing, and a housing boom have made India more attractive than any other emerging economy, Khandelwal said.

"The only point one needs to appreciate is that it’s no longer a blanket emerging market allocation (by global allocators) anymore," Kothari said. One needs to identify the better-performing economies within emerging markets, and India certainly ticks that box with macro stability, political stability, currency, and future outlook, he said.

“Moreover, global funds are still underweight on India; so, even if they make it equal weight, we will receive sizable flows, and I won’t be surprised if over the next 5 years we receive $25-40 billion of FPI flows each year knowing well that the flows have slowed down over the last few years. Probably a lull before the storm in my view," he added.

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A favourable rate cut scenario and US elections could drive more inflows in India.

Although DII flows are largely structurally positive, “the flows could slow down or face a challenge if and when we have a significant market correction, and alternatively, if the taxation on equities is bought closer to debt or there is a lowering of tax on fixed income instruments," pointed out Raheja of Julius Baer.