After supporting the Indian markets through the lows of covid-19 pandemic with massive buying in the months of March, domestic institutional investors have now become big time sellers of Indian equities.
Data shows that domestic institutional investors (DIIs) including mutual funds and banks have sold Indian shares worth Rs10,450.61 crore in July, marking the highest outflow since March 2019.
Last month, DIIs were net buyers of Indian equities worth Rs2,461.41 crore. In March,when markets had tanked over 20% in a single month following the outbreak of covid-19 and the subsequent nationwide lockdown, DIIs made a record purchase of Rs55,595.18 crore.
Market observers believe that sell-off by DIIs is mostly due to profit booking as markets have seen a robust rally in the last three months mostly riding on the wave of foreign money finding its way into emerging markets including India. Both benchmark indices Sensex and Nifty are around 11% away from record highs touched in January. In this year so far, DIIs are still net buyers of Indian equities worth ₹78,458.51crore.
"Inflows into domestic mutual funds have dropped off significantly in the last couple of months, as bulk investors have used buoyant markets to take profits and also to increase liquidity buffers for their own purposes; even systematic investment plan (SIP) flows have started reducing as was evident last month," S Hariharan, Head - Sales Trading, Emkay Global Financial Services said.
According to Hariharan, the reason for sell-off by DIIs in secondary markets could also be possibly due to a spurt of deal activity with a strong pipeline of offerings by many large-cap companies coming up in the next few months. “In the absence of fresh inflows, mutual funds have been forced to create liquidity to be able to participate in these deals," he reiterated.
Buoyancy in the stock markets which led to a 7% rally in July was mostly due to the flush of foreign funds parked in equities. In June, foreign institutional investors (FIIs) were net buyers of Indian shares worth $1.08 billion, after buying $2.4 billion last month. In 2020 so far, FIIs are still net sellers of Indian shares worth $1.35 billion after massive sell-off worth $7.88 billion in March.
"The ongoing covid-19 pandemic still poses economic risks," said Kotak Institutional Equities. According to analysts at Kotak Institutional Equities, the sharp retracement in prices of most quality stocks from their mid-March lows has made the markets’ reward-risk balance less favorable.
Fund managers are expected to assess the economic situation to re-allocate portfolio post the corporate earnings in the June quarter which is indicative of gradual resumption of business activities. Consumption is expected to revive slowly amid severe job losses. However, valuations of Indian markets have become steep as optimism over a potential vaccine for covid-19 led to a massive rally of stocks without any fundamental support of earnings.