Statsguru: Falling foreign ownership in booming Indian stock market

Foreign investors now own a smaller share in the booming Indian stock market than before.
 

Their holdings now account for 16.3 per cent of the total market, likely the lowest in a decade, according to a report by brokerage firm ICICI Securities. However, the value of their holdings continues to rise and it touched nearly Rs 62 trillion as of January-end (Chart 1).

 

The decline in foreign ownership also reflects increased buying by domestic institutions, incl­u­ding mutual funds. Domestic institutional inv­e­stors owned a nearly 16 per cent stake, according to the latest available December quarter num­bers. It was around 13 per cent in 2019 (Chart 2).

 

Mutual fund investors allocated nearly Rs 19,000 crore through monthly systematic investment plans (SIPs) in January, according to industry data. This represents a 36 per cent increase over the same period last year.
 

Foreign investors invested more money in riskier midcap and smallcap stocks even as their overall stake came down (Chart 3).

 

They have also been allocating higher amou­nts to debt. Indian debt securities are due to be included in global indices, which are expected to attract additional capital. Inflows into Indian debt recorded their hig­h­est levels since July 2023 on a trailing 12-month basis in February (Chart 4).

 

The decline in foreign stake in the equity market comes even as earnings growth remains robust. Earnings and index returns have largely moved in line with each other over long periods (Chart 5).

 

Currency can be a key factor, with some analysts predicting an appreciating trend for the rupee in 2024. This can act as a tailwind for foreign investor returns.
 

There has been a difference in long-term returns in the past for the Indian investor vis-à-vis foreign investors even for the same holdings. The annualised return over the last decade was 330 basis points lower for foreign investors due to the rupee’s depreciation (Chart 6).