Retail investors take a step back on higher market volatility

Institutional share of trading turnover has been rising as markets fell from highs

Individual investors, especially smaller retail ones, may be taking a breather as higher volatility takes markets down from its pandemic highs.

Foreign portfolio investors, mutual funds, proprietary entities and banks account for a greater proportion of cash market turnover than at any point since the pandemic began, shows an analysis of exchange and regulatory data.

The average share of these institutional investors on a three-month rolling basis is 48.1 per cent as of regulatory data up to December 2021. This is the highest in at least 30 months (see chart 1). This comes even as markets have fallen from their highs. The S&P BSE Sensex hit an all-time high of 62245.43 on 19th October 2021. It has since fallen more than 7.4 per cent to close at 57,621.19 as of Monday.

The fall had started shortly after hitting a high in October. It was down to 59,307 as of October-end. It fell further to 57065 as of end-November. There has been some recovery since, followed by another bout of selling.

Central banks across the world are scaling back on the amount of liquidity they are pumping into the global financial system. This reduces the amount of money that had earlier been available for investments, including into emerging markets like India. Foreign portfolio investors have been net sellers by Rs 80,603 crore since October in Indian equities.

The resultant volatility has seen wilder swings in the market than before. The daily volatility of the S&P BSE Sensex went up from 0.8 per cent in October to 1.06 per cent in December. Mutual funds have come in as large buyers. They have been net buyers by Rs 59, 024 crore between October and December 2021 as per the Securities and Exchange Board of India’s latest bulletin.

Another indicator that is indicative of retail investor activity is trading turnover coming through internet-based avenues. A large number of retail investors signed up for trading during the pandemic. This has caused internet-based trading to go up as they transact through online demat accounts. The value of these transactions saw a decline of 13.9 per cent in December 2021 for the cash market on the National Stock Exchange. It fell by seven per cent for the equity derivatives segment. The decline was in addition to what had already been seen in the previous month.

Cash market turnover through Internet-based trading (IBT) was already down 7.6 per cent over the previous month in November. Equity derivatives had seen a 4.9 per cent decline over October at the time. The December figures suggest a further decline since, according to the National Stock Exchange’s monthly Market Pulse report.

“The trend in IBT has gained momentum since March’20 due to increased retail participation, particularly since the nationwide lockdown, as retail investors and traders started utilising this online platform to trade from their homes,” it said.  

Internet-based cash segment trading growth is still up 6.9 per cent year-on-year as of the December quarter, according to the NSE report. Growth in internet trading of equity derivatives was down  4.9 per cent over the previous year, it added.