As the markets continue their slide on the back of the Budget announcement on long term capital gains tax on equities and concerns around inflation and accelerated hike in interest rates in the US, the Indian markets witnessed two contrary strategies adopted by foreign portfolio investors and domestic institutional investors. Between Monday and Tuesday, while the FPIs sold Indian equities worth Rs 3,589 crore, the DIIs pumped in Rs 2,862 crore in the market thereby acting as a counter-balance force and reducing the impact of FPI outflow.
As FPIs moved out of Indian equities and other emerging markets to park funds in US treasury bonds, some large DIIs took the fall in Indian markets as an opportunity to invest. Market participants say that while imposition of long term capital gains tax in India and expectations of interest rate hike in the US played on the minds of several FPIs and some domestic investors, there were other India based institutional investors who pumped in money in the market.
The trend is in sharp contrast to what was witnessed last month. While DIIs had invested a net of only Rs 398 crore into the equity markets, the FPIs had pumped in a net of Rs 13,781 crore.
A couple of market participants who did not wish to be named said, “Some large DIIs were booking profits in January and they may have invested in February after the markets fell.”
Another raised concern that if the imposition of LTCG disrupts the inflow of funds into mutual funds and into equity markets, then FPI outflow will have a bigger impact on the market. “as for now, the domestic inflow has ensured that Indian markets fall less than what other major markets have seen,” said the head of research of a mutual fund.
In calendar 2017, the rise in markets was primarily driven by retail inflow of funds into equity markets and investment by domestic institutional investors especially the mutual funds. In 2017, while the Sensex at the Bombay Stock Exchange rose 28 per cent in 2017 and the mid cap and the small cap indices rose 48 per cent and 60 per cent, respectively, the rally was mostly led by domestic investors.
While data available at the BSE shows that DIIs invested a net of Rs 86,372 crore into Indian markets in 2017, data accessed from Association of Mutual Funds in India (AMFI) shows that the net inflow into equity schemes of mutual funds for the calendar 2017 stood at an all-time high of Rs 140,201 crore. By comparison, the FPIs invested only Rs 58,109 crore.