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The Indian stock market has seen a tectonic shift in the share of cash market turnover of different players. The elusive retail investors’ money parked in the securities market in the form of mutual funds and other instruments has now gained prominence. The shock-absorbing capacity of retail investors and their contribution to the stability of the Indian stock market in the face of significant outflow of foreign portfolio investment is remarkable. The net inflows by retail investors in the NSE cash market segment reached 1.405 trillion in 2021, compared to 0.512 trillion in 2020. New investor accounts reached 32 million in 2021. These traits definitely speak of the transition of the Indian securities market into a developed securities market.

The share of foreign portfolio investors (FPIs) in the total cash market turnover on Indian stock exchanges was around 15% in 2010-11. This reduced to 12% in 2021-22. FPIs have pulled out net 1.22 trillion in 2021-22, which beats the total outflows of 0.84 trillion summed together for 2015-16, 2018-19 and 2019-20, the years that saw net FPI outflows over the last 10 years. Undoubtedly, the Indian market has seen big outflows, but the confidence of FPIs continues in the Indian securities market.

This is testified through the highest assets under custody (AUC) of FPIs as of 2021-22, which stand at 51 trillion, followed by mutual funds ( 31 trillion) and insurance ( 26 trillion). The AUC of FPIs to GDP ratio is nearly 22%.

In terms of the ownership trend (as per market cap) in the NSE listed companies, FPI holdings have been ranging in the same vicinity of 19-21% over the last three years while the share of retail investors has increased from 8.6% to 9.7 % during the same period. This further reinforces that even though retail participation has increased, FPIs have stayed put over the years.

The current FPI outflows are largely in the context of their natural way of operating when they pull out money in a scenario of rising interest rates and due to some exogenous factors such as war, geopolitical tensions, and crude oil price fluctuations, among others. FPI outflows have not been a phenomenon specific to the Indian economy but have also been witnessed in other emerging economies.

Another aspect which will help appreciate the importance of FPIs is their overall contribution to the country’s balance of payments.

In the earlier years of liberalization (for the period 1993-96), a major share of foreign investments came through the route of FPIs compared to foreign direct investment (FDI), though both routes are a form of ‘non-debt creating’ capital flows to India. However, the concern is that FPI flows are more volatile and align themselves with the prevailing domestic and international scenarios. Another noteworthy point is that, though the secondary market has witnessed outflows, there has been significant resource mobilization of around 0.052 trillion by FPIs in the primary markets.

According to the Reserve Bank of India’s Annual Report 2021-22, FPIs maintained their investment interest in the primary market segment and a large chunk of flows was diverted by FPIs from the secondary to the primary market during the November-December 2021 period when big ticket initial public offerings (IPOs) hit the Indian capital market.

Further, when it comes to supporting newer kinds of investment products in India, it is the FPIs which provide a push to the big-ticket investments in Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (ReITs).

Recognizing their role, in the Budget of 2021-22, it was decided to permit FPI investment in debt securities issued by InvITs and REITs.

This was aimed at increasing liquidity and attracting capital, leading to wider participation by global investors as well as encouraging participation by domestic players.

Another area where FPI push is required is in corporate bonds which is currently in the range of 19-20%.

Thus, FPIs have an important role to play in the Indian economy. The thrust of policy reforms has always been on shifting capital flows from debt to non-debt creating flows in the form of FPIs and FDI. Though much success has been achieved in case of unabated FDI, we cannot lose the guard of FPI flows given the huge capital requirements of India.

Mitu Bhardwaj and Rasmeet Kohli are working with National Institute of Securities Markets. Views are personal.

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