Surge in domestic inflows acts as cushion for Indian equities

Historically, FPIs have dominant market price-setters, given their size, trading patterns in India

The surge in domestic institutional equity inflows is beginning to insulate the Indian equity market, which has largely been determined by the velocity of overseas inflows so far.
 
The analysis of monthly equity inflows and MSCI India performance shows that between 2004 and April 2014 (pre-national election), periods of foreign portfolio investors (FPIs) selling coincided with MSCI India declining by seven per cent (median). Since May 2014 — which saw the beginning of the shift towards household savings moving into financial assets — the decline in MSCI India during periods of FII selling has reduced to less than one per cent (median), according to a report by Deutsche Bank Research. 
 
Historically, FPIs have been the dominant market price-setters, given their size and trading patterns in India. The past couple of years have indicated a change, with domestic institutional investors (DII) flows increasingly being the primary driver of market direction.
 
DIIs have pumped in excess of Rs 1 lakh crore in the past two financial years, mostly led by robust investment from mutual funds (MFs). This compares with inflows of Rs 45,000 crore from FPIs during the period.

 
The rise in the share of domestic investors reduces dependence on the more volatile foreign inflow, say market experts. Over the past three years, the trend of investing through systematic investment plans (SIPs) into MF schemes has increased. There are now a little over 10 million SIP accounts, with an average size of over Rs 3,500.
 
The new financial year has started with strong inflows into domestic equity mutual funds. Mutual funds’ equity and ELSS schemes saw aggregate net inflows of Rs 94 billion ($1.5 billion) in April 2017. This is more than twice the April 2016 inflow and 61 per cent higher-than-past 12 month average. The April to June quarter is considered as a relatively lean period for inflows into equity schemes.
 
DIIs’ participation in Indian equities has also been boosted by Life Insurance Corporation of India (LIC), the country’s largest insurer, which has raised its equity investment over the past few years. The total value of LIC holdings has risen by a little more than 50 per cent since December 2012 to Rs 4.7 lakh crore at the end of the December 2016 quarter.
 
“An equity investment culture is rising and is taking a more formal form. Most new-age investors are professionals earning a livelihood in other industries; stock markets are simply a vehicle for their savings. Given the lack of expertise, resources and time, these investors are investing through insurance schemes and MFs,” said a recent note by foreign brokerage Jefferies.