Aggressive buying from domestic investors has blunted the impact of sell-off by foreign portfolio investors (FPI) since July this year. FPIs have been net sellers for the third consecutive month in September, leading to a correction in stock prices on Dalal Street.
But the fall has been moderated by an equally large buying by domestic mutual funds and insurance companies, indicating the continued interest of retail investors in the equity market.
FPIs have so far withdrawn nearly Rs 33,700 crore from the secondary equity market since the beginning of July 2019, but it has been more than made up by fresh investment by domestic institutional investors (DIIs). DIIs have been net buyers to the tune of around Rs 43,800 crore in the last three months, outpacing the sell-off by during the period.
September 2019 is the fifth consecutive month of net purchases by DIIs. In all, domestic institutions have pumped in nearly Rs 53,000 crore in the secondary equity market since the beginning of May this year.
Slowdown across sectors and a slump in GDP growth has led to FPIs pulling out but DIIs are bringing in money into small and mid caps.
"If we exclude NIFTY50 stocks, others have lost about Rs 30 lakh crore from the January 2018-peak. Small and mid-cap stocks have lost at an unprecedented level. They had hit a peak of Rs 20 lakh crore two years ago; last Friday they were at Rs 8 lakh crore. This has made small and mid-caps very attractive for DIIs," says G Chokkalingam, Founder, Equinomics Research and Advisory.
However, this is not the case with large stocks, were FPIs are focussed. Large cap stocks have gained or marginally corrected, he adds.
"This trend has just started where retail investors are looking back at this space. Unless there is any major adverse event, it will continue for the next few months," Chokkalingam says.
When FPIs take out money, it is a negative for the economy as it adversely impacts stock valuation, making it difficult for people to raise money besides a decline in rupee value.
"However, what FPIs have taken out so far is not a big amount - it is just under 2 percent of their cumulative investment. It is not a matter of grave concern."
Historic data on investment flows suggests that the domestic investors have generally been more bullish on Indian equity growth story than their foreign peers. For example, DII were net buyers for thirteen consecutive months beginning January 2018, unlike FPI who alternate between buying and selling every few months. In comparison, FPI have been net sellers in 11 out of last 21 months beginning January 2018, while FPI have been net sellers in only three out of 21 months during the period.
In all, DIIs have pumped in around Rs 1.44 lakh crore in the secondary market since the beginning of 2018 calendar year against a net investment of around Rs 11,200 crore by FPIs during the period.