Even as foreign investors have stepped up buying, owing to the announcement of bold reforms in the last few trading sessions, domestic institutional investors (DIIs) continue to sell.
Market experts believe portfolio flows from foreign investors would remain strong due to reforms and stimulus programmes announced by the US Federal Reserve and the European Central Bank (ECB). However, DII flows could continue to languish due to redemption pressure on mutual funds and lack of retail participation in the market.
In the last three trading sessions, foreign institutional investors (FIIs) bought net shares worth Rs 6,135 crore after the government increased diesel prices and opened up the retail and aviation sectors to foreign direct investment (FDI). In contrast, DIIs, which include entities like mutual funds and insurance companies, sold net shares worth nearly Rs 2,200 crore during these three sessions.
Strategists at several foreign brokerages like Morgan Stanley, Citigroup and Deutsche Bank have increased their Sensex targets due to the improved domestic sentiment and the global liquidity scenario. Some brokerages expect a rise of about 10 per cent from the current levels, with the Sensex surpassing 20,000.
According to Securities and Exchange Board of India data, so far this year, FIIs have invested about Rs 61,000 crore ($13.7 billion) in Indian equities. However, DIIs sold shares worth about Rs 32,000 crore during the same period — the highest since 2005.
In a report, Aditya Narain, head of India research, Citigroup, stated the market would continue to rise, primarily due to foreign flows. He added domestic flows would only start coming in after the market rose another 10 per cent from its current levels.
Experts say flows from retail investors and DIIs would improve once the market stabilises or crosses the previous all-time high. “When the 2003 rally began, domestic investors started coming into the market only when the market crossed its then all-time high in 2004. This time, too, domestic investors would start investing only after the market crosses its all-time high. I expect this to happen in the January-March period next year,” said Sandip Sabharwal, chief executive (portfolio management services), Prabhudas Lilladher.
“The way the market has moved up, it has not given anybody a chance to enter. Domestic participation would only be seen if the market stabilises at current levels,” said Prashanth Prabhakaran, president (retail broking), India Infoline. “Equity mutual funds are facing huge redemption, signalling fear is still there,” he added.
Heavy redemption pressure on equity mutual funds this year also led to heavy selling by domestic institutions, especially mutual funds. In August, equity mutual funds recorded their second-highest outflow — about Rs 2,300 crore. So far this year, net outflow from equity funds stands at about Rs 7,800 crore.
“The right time to invest was in December 2011, when there was gloom and doom. Since then, the market has given returns of about 20 per cent. Unfortunately, the money comes only after the market moves up,” said Anand Shah, chief investment officer, BNP Paribas Asset Management India.