Is local money starting to provide a floor to the stock market?

In a market whose tone and tenor is dictated by foreign investors, the past few months have shown domestic players can fight back. Take September, for instance; through the month, foreign portfolio investors (FPIs) sold net equities worth ₹6,475 crore through the stock exchanges, according to data with depositories. At the same time, domestic institutional investors (DIIs) went in the opposite direction, buying nearly twice as much, or net equities of ₹10,273 crore, data with the BSE show.

The Sensex rose 1.7 per cent through September, but also touched a 15-month low at the start of the month. If this trend continues, Indian bourses could become agnostic to FII behaviour.

Gopal Bhattacharya, Head — Global Markets, Societe Generale India, sees this as the start of local money providing a “price floor” to the secondary market.

“We’re not there yet, where DIIs can dictate daily market movements. But what is significant now is that DIIs are providing a strong floor to the markets, so prices don’t drop beyond a certain point. But the everyday volatile movements we see is still based on the foreign investor behaviour.”

Another signal of investor optimism in domestic equity is the behaviour of mutual funds, which account for a chink of stock market investments. According to data from the fund industry body AMFI, inflows into equity and equity-linked mutual funds touched ₹5,444 crore through September.

Equity schemes have seen massive inflows this calendar year at ₹51,869 crore (net), up over 30 per cent from the ₹33,790 crore last year.

Rajiv Shastri, MD and CEO, Peerless Mutual Fund, believes the divergence in investing behaviour between FPIs and DIIs is because of the unique situation that India now finds itself in. “For a foreign investor, India is part of an emerging market grouping, like BRICS. But because of low commodity prices globally, India — a net importer of commodities — stands to gain now while all the others in the group are net exporters. But for a foreign investor, everything moves in lockstep. A domestic investor can see the effects on the ground from low commodity prices; inflation has remained muted despite a bad monsoon. So, they know the economy has room to grow.”

Bhattacharya believes that FPIs’ selling behaviour is influenced by the general bad news in global markets. “When an investor reads news of the Chinese economy slowing, he will have to be a really confident contrarian to bet on India’s prospects. Within India, local money is a lot more confident about investing in its own stock market, and as equity market penetration increases, domestic buying is set to get stronger.”

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