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The main drivers of the sustained bull rally in the markets were the domestic institutional investors (DIIs), including mutual funds, insurance companies and other financial institutions. However, foreign portfolio investors (FPIs) were not showing the same enthusiasm and remained sellers in the cash market during most of the sessions since December 2023 when the Sensex hit the 70,000 level for the first time.
Aided by huge inflows into equity schemes, mutual funds bought stocks worth Rs 2,40,000 crore since January this year, neutralising the FPI selling in the market. On the other hand, FPIs pulled out Rs 1,21,000 crore from the Indian stock market — excluding investments in the initial public offerings (IPOs) — in the last six months, according to exchange data. Domestic funds bought stocks worth Rs 1,55,000 crore from March to May this year ahead of the Lok Sabha elections. FPI sell-off was more pronounced in May when they withdrew Rs 42,214 crore from the cash market before the announcement of the election results.
After showing volatile movements, especially in the first week of June when the election results were in focus, the Sensex has gained over 10,000 points (between December 11, 2023, and July 3, 2024) largely by domestic fund buying.
Net inflows into equity mutual funds have been showing a good growth month after month. Inflows grew 83 per cent month-on-month in May. “This money is now being deployed in the stock market, taking the indices to new peak. Mutual funds went on a buying spree, sending the indices to new peaks. Some small and mic-cap stocks witnessed froth as a result of the DII buying spree,” said a market source. Insurance companies led by LIC which mobilised Rs 3,70,543 crore as new premium income in FY2024 also invested a significant portion of this money in stocks during the last six months.
The FPI strategy during most of recent months was to sell India which is expensive and buy China which is very cheap mainly through Hong Kong. “The PE ratio in India is more than double the PE ratio in Hong Kong. So long as this ‘Sell India, Buy China’ trade sustains, FPI selling will weigh on the markets,” said an investment analyst.
Although the participants remain cautious of the high valuations, they do not want to miss out on the opportunity, Deepak Jasani, Head of Retail Research, HDFC Securities said. The near-term triggers of the forthcoming Union Budget and the FY25 first quarter results have provided the opportunity to the participants to build positions ahead of them.
India is one of the few large markets that offer visible growth at a good pace over the next few years unaffected mostly by global developments. A decent monsoon in terms of spread and intensity could improve the prospects of growth even further while bringing down inflation, he said.
Aided by gains in manufacturing and services sectors, business activity in the country got further strengthened in June with the pace of job creation fastest in over 18 years, according to HSBC purchasing managers’ index (PMI) survey released last week.
Markets are also expecting retail inflation to ease in the coming months which is likely to prompt the Reserve Bank of India to consider a rate cut. “A rate cut by the US Fed over the next few months could make equity as an asset class even more attractive, benefitting Indian equities by way of more inflows,” Jasani said.
