Covid-19 pandemic Impact: Retail-powered DIIs help beat FPI sell-off

In October last year, the US Federal Reserve took a hawkish turn in the wake of spiralling inflation. It began preparing the markets for the unwinding of the post-pandemic stimulus measures. 

The bond markets started reacting to the Fed’s hawkish pivot with yields on the 10-year US Treasury moving towards the dreaded 2 per cent mark. This led to foreign portfolio investors (FPIs) retreating from risky assets, mainly emerging markets (EMs) like India. Since October, FPIs have pulled out over Rs 2 trillion in what has been one of the most aggressive periods of selling by foreign investors from the Indian market. 

This has definitely weighed on the performance of domestic stocks. But the impact is nothing compared to the crash witnessed during the 2008 Global Financial Crisis (GFC). The reason: The buying support provided by domestic institutional investors (DIIs).

DIIs have stepped up buying in the past six months and safeguarded the markets from a steep fall amid the relentless sell-off by FPIs.

In the past six months, FPIs have sold equities worth Rs 1.46 trillion; DIIs, on the other hand, have bought shares worth Rs 1.6 trillion -- of which mutual funds alone have purchased shares worth Rs 1.2 trillion. This buying has provided much-needed stability to the equity markets and helped India outperform its EM peers.

The life insurance industry, which has seen high double-digit growth in the past few years with regular flows in half-yearly or yearly renewal premia, also has joined forces with MFs.

The country's largest insurer, Life Insurance Corporation (LIC), has aggressively purchased shares during bouts of heavy FPI selling, with the value of its holdings hitting an all-time high of Rs 9.5 trillion during the December 2021 quarter.

The counterbalancing provided by MFs, insurance companies, and direct retail investing has cushioned the market fall. The Sensex has slipped less than 10 per cent from its all-time high of 62,245 on October 19, 2021. The impact of FPI selling during the GFC was more acute as the benchmark Sensex had crashed nearly 70 per cent from highs of around 20,800 in January 2008 to 8,500 in October 2008.

A recent report by ICICI Securities noted that the ongoing FPI selling is the highest since the Global Financial Crisis in 2008. The trailing-12-month (TTM) FPI selling stood at $36 billion against $28 billion during GFC. 

 ICICI Securities said the buying by DIIs heralds the structural deepening of domestic savings into equities in India. "Such behaviour of aggressive buying during declining stock prices by domestic investors should result in improved long-term outcomes for their portfolios versus buying in a high-optimism phase of the market, thereby setting off a virtuous cycle," it observed.

 Some analysts, however, said the fundamental structural change has happened with retail investors becoming the fourth pillar of the market, in addition to FPIs, DIIs and HNIs.

 “The number of Demat accounts and retail contributions via mutual funds have gone up in the past few years. It is the belief of retail investors in the market that has changed,” said U R Bhat, co-founder, Alphaniti Fintech.

 Ambareesh Baliga, an independent market expert, said DII buying is underpinned by retail flows coming through systematic investment plans (SIPs).

 "DII buying is more stable because retail investors don't pull out in a hurry. The markets are holding up because of the money flow through mutual funds. If that money flow stops, we have to see where the money flow will come from," said Baliga.

 While retail inflows into the market is a reason to cheer, experts say one needs to see their behaviour when there is a serious downturn.

 “Most of these investors haven't seen a bear market or significant erosion in the value of their holdings. But once they see losses of 25 per cent or more, we have to see whether they will stick to equities,” said Bhat.