Higher-than-expected GDP growth of 7.6% in the quarter ended September 2023 has raised sentiment, and investors are factoring in expectations of an early rate cut by the Fed and a fall in the yield on 10-year US Treasury bonds.
The Fed does not expect further tightening will be necessary, and foresees three quarter-point cuts to the benchmark interest rate next year. A fall in the US interest rate means foreign investors will pump money into emerging markets like India; foreign portfolio investors (FPIs) have already made a comeback this month.
Signals from elections
The indication of political stability after the 2024 Lok Sabha election is a positive factor. According to Madhavi Arora, Lead Economist, Emkay Global Financial Services, the prospect of the BJP returning to power is seen as a positive for policy continuity and long-term growth.
“We expect election-linked market volatility to remain low, which may result in the market trading at rich valuations in the near term,” Kotak Institutional Equities said in a report.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said: “The indication of political stability after the general elections, strong growth momentum in the Indian economy, inflation cooling off, steady decline in US bond yields and the correction in Brent crude have turned the situation in India’s favour.”
A Balasubramanian, Managing Director & CEO of Aditya Birla Sun Life AMC, said India’s equity markets have given a thumbs-up to the results of the state elections earlier this month. “The equity market looks at how money is being spent effectively and at sustainability in policymaking, and the market reaction is a clear endorsement of growth and not driven by freebies,” he said.
Surge in demat accounts
The opening of new demat accounts by a large number of investors is an indication of the entry of a host of new players into the markets.
On November 22, CDSL, Asia’s first and only listed depository, said 10,09,72,870 demat accounts were registered with it, and that more than 1 crore accounts had been added since July this year, and 3 crore since August 2022. The value of securities in custody is Rs 536.67 lakh crore.
There is often a surge in the opening of new demat accounts during market rallies. “This…holds good during the ongoing rally too. The sharp 15% rise in the Nifty from its March lows, and news of the consequent wealth creation is attracting new investors. This trend will continue as long as the market remains resilient,” Vijayakumar said.
Retail investors investing directly and through MFs played an important role in supporting the market when FPIs went on a selling spree from October 2021 through June 2022.
Domestic mutual funds
The MF industry’s net assets under management (AUM) rose to Rs 49,04,992.39 crore in November 2023 compared to Rs 40,37,560.81 crore in November 2022, data from the Association of Mutual Funds in India (AMFI) show.
Retail AUM, which includes equity, hybrid and solution-oriented schemes, grew 29.15%, or more than Rs 6 lakh crore, to Rs 27.01 lakh crore in November 2023 compared to Rs 20.92 lakh crore in the same month of the previous year. The number of retail portfolios increased by around 16% to 12.92 crore in November this year from 11.18 crore in November 2022.
The contribution of systematic investment plans (SIPs) reached an all-time high of Rs 17,073 crore in November 2023. The number of outstanding SIP accounts reached its highest ever at 744.14 lakh in November 2023, with 30.8 lakh SIPs registered during the month.
Comeback of FPIs
FPIs have pumped in Rs 1.44 lakh crore in the equity market in 2023 this year, including the cash market and initial public offerings. After taking out Rs 39,000 crore from the equity market in September and October this year, FPIs have made a major comeback in December, having invested more than Rs 39,260 crore so far this month. In November, even though FPIs made an investment of Rs 9,000 crore in India, they were sellers for Rs 368 crore in the cash market.
FPI inflows are likely to continue going forward. FPIs have turned buyers in leading banks where they were sellers. Large caps in segments like IT, telecom, automobiles and capital goods are also witnessing buying.
Also, the yield on 10-year US Treasury Bills has fallen from 5% in October to the 4% level. Foreign flows will look for alternatives, including India, where returns are higher.
Need for caution
New investors normally chase low-grade small caps which slowly run into bubble territory. Seasoned investors normally take this as a sign of caution. Further, retail investors have the tendency to buy even overvalued small and mid-cap stocks. When the market undergoes a major correction, these retail investors are stuck with overvalued stocks.
The number of active demat accounts on the Central Depository Services Limited (CDSL) platform crossed 10 crore last month. 
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