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Growing retail inflow makes up for FII exit, provides depth to markets

While a lot is expected from the Budget, a strong participation by domestic and foreign investors and rise in the markets will among other things.

Written by Sandeep Singh |
December 29, 2014 1:44:40 am

Net inflows or sell-off by foreign institutional investors always leads to a rally or a fall in the stock markets. However, the resilience shown by the markets over the last few trading sessions even as FIIs turned net sellers shows the inherent strength of Indian markets on the back of rising domestic participation which is a rare sight in the Indian markets.

To start with facts — the last 10 trading sessions saw FIIs sell shares worth net of Rs 9,639 crore from Indian equities much in line with their annual practice when they sell some of their holdings in December and go on vacation. In the same period, the domestic institutional investors seem to have made up for the FIIs absence and invested a net of Rs 5,532 crore. Though the FIIs sold in huge numbers, the markets held their ground. Over the last five trading sessions even as the FIIs sold a net of Rs 5,007 crore, the equity markets rose by 498 points or 1.9 per cent following investments from domestic institutions that invested a net of Rs 2,684 crore in the same period.

Mutual funds stood at the core of this domestic institutional participation on account of increased participation from local investors ever since the new government came to power.

At a time when a lot of emerging and developed markets across the world are undergoing some challenges or are witnessing a slowdown, experts point that India is relatively better positioned among all other emerging markets on account of a pick in the gross domestic product (GDP) growth rate, government’s resolve for better governance and rise in domestic participation. These along with the domestic consumption story provides an inherent strength and depth to the Indian markets and makes a case for retail investors to participate in the domestic growth story.

Retail participation in MF at all time high

The year 2014 can clearly be termed as a story when the Indian retail investors came to the forefront. After two consecutive years when the net investment by investors in mutual funds stood in negative, the financial year 2014-15 has seen a turnaround. The first eight months of the ongoing financial has already witnessed a net investment of Rs 43,965 crore into equity funds of mutual funds and this is the highest ever in a year. This is higher than the previous high registered in the year 2007-08 when the net inflows in equity mutual funds stood at Rs 40,782 crore and that in 2006-07 amounted to Rs 22,322 crore.

The retail participation picked up after hopes of one party getting a clear mandate in the general elections 2014 became strong and the inflows jumped after the Narendra Modi-led government came to power. Even the FII inflows witnessed a jump on expectations of a strong government coming to power.

Is the trend likely to continue in the future?

Though the real economy has not picked up and investment cycle has yet to take-off, steps such as diesel deregulation, re-promulgation of Coal ordinance to pave way for coal mine allocations and ordinance on insurance bill have been taken as positive as shows government’s resolve to move ahead on critical legislation’s. Markets expect that the government may take several key decisions in the upcoming budget that may set the growth agenda for the coming few years.

Experts feel that India lagged behind other emerging markets in terms of performance over the last couple of years on account of governance-related issues and a strong and stable government at the centre provides the desired confidence to the markets.

“Since it was mostly due to governance led issues that India was not doing well, Narendra Modi led government coming to power provided the confidence to the markets that governance will be back and that has driven the markets since then,” said CJ George, MD, Geojit BNP Paribas Financial Services.

Along with hopes of growth in domestic economy, a revival in US is also expected to provide some impetus to growth. The growth rate of 5 per cent in the third quarter, beating all market expectations, provided a fillip to the markets worldwide pushing the Dow Jones Industrial to an all time high of over 18,000 mark. Experts feel that a strong growth in the US economy will have a cascading effect on growth across the world that is witnessing a slowdown. While

India will also be a beneficiary of growth in the largest economy, it is also expected that US growth will result into some outflows from the country and that may put pressure on rupee.

“A strong US growth augurs well for global growth including emerging economies. We are expecting a rate hike by the US Federal Reserve between March and June 2015. While this may result in some fund outflows from India and weakness in rupee, part of it can already be seen in the market,” said Nandkumar Surti, CEO, JP Morgan AMC India.

If those factors may play up going forward, decision on rate cut by the Reserve Bank of India in February and the announcements by the government in the forthcoming budget is something that may provide an impetus to the markets in the near term. While the government had the excuse that they did not have enough time to do much in the first budget in July 2014, market experts point out the huge expectations this time around following the statements made by the finance minister himself in the recent past.

“Fund inflows are expected to rise ahead of the budget as there is huge expectation both globally and domestically from the government’s forthcoming budget,” said George.

While FIIs are expected to come in with their funds going forward in India as other emerging markets are undergoing pressures on account of falling commodity prices and dip in export led growth, retail investors will do good to themselves by keeping pace with the FII inflows and participate in the domestic growth story by raising their exposure in the equity markets.

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