Investments by domestic institutional investors (DIIs) in the Indian stock market crossed the Rs 2 trillion mark, so far in 2022. With still six-and-a-half months to go in the year of 2022, investments by DIIs in the equity market is the highest ever in a single calendar year.
Analysts say that investors have been taking advantage of the correction in the market, that has been feeling the jitters over rising inflation, surging crude oil prices and geo-political tensions.
Further, DIIs have been net buyers (they bought more equities than they sold) for 16 consecutive months even as foreign institutional investors (FIIs) have been net sellers.
“Domestic flows are coming to the market as people are shifting from physical assets and investing heavily in financial assets. The number of demat accounts and mutual fund investors have grown manifold in the past couple of years. Rising interest rate always poses a risk to equity investment to some extent. It may (negatively) impact a small portion of SIPs (systematic investment plans), going ahead. However, India’s growth story remains intact, and we expect Indian equity to deliver double-digit returns over the next one to two years. Therefore, domestic inflows will remain strong,” said Mitul Shah – Head of Research at Reliance Securities.
According to a Jefferies India report, Indian households save about Rs 53 trillion annually, and at the current rate of equity allocation in household savings (4.80 percent), the incremental annual equity allocation works out to Rs 2.52 trillion. Of this, the annual contribution through SIPs in mutual funds alone stands at over Rs 1.44 trillion.
In addition, approximately Rs 25,000-30,000 crore is being invested in equity markets by the Employees’ Provident Fund Organisation (EPFO) as part of its 15 percent allocation to equity market. A recent news report suggested that the government is now proposing to gradually increase the allocation by EPFO to 20 percent. If this proposal goes through, that would mean more money flowing into Indian equity markets. However, data from banks and insurance companies regarding their net investment in equity markets is not available.
“These institutions have to deploy the monies received by them into the intended funds, with a little leeway about raising or cutting their cash holdings. As long as the net flows are positive, they have to keep investing in the markets,” said Deepak Jasani, Head of Retail Research, HDFC Securities.
According to brokerage firm Reliance Securities, India is better placed compared to most other nations for attracting investments. Besides, events in China, such as the spread of COVID-19, and regulatory clampdown on businesses such as fintech firms have led global as well domestic investors to put their China investments on hold and to focus more on other emerging economies, mainly India. This too, say analysts, is the key catalyst for higher growth, which would continue, going forward. Though DII flows would moderate due to monetary tightening, analysts expect inflows to continue in FY23.
Akhil Chaturvedi, Chief Business Officer, Motilal Oswal Asset Management Company (MOAMC), says this counterbalancing impact of domestic flows reflected in relatively moderate volatility despite unprecedented FPI outflows.
Meanwhile, FIIs sold $23.87 billion in domestic equities so far this year amid higher crude that continues to stoke worries about higher inflation and fiscal deficit. So far this year, the Sensex and the Nifty have fallen nearly 9.2 percent each. The US Federal Reserve will meet on Wednesday, when it is expected to continue raising rates amid higher inflation, while Bank of Japan will conclude its two-day meeting on Friday.