Domestic institutional buying aids market bounce-back

Renewed purchases by domestic institutional investors, including insurers and mutual funds, have aided the recent rally in shares. Though the consensus is the stock market outlook remains bearish, these investors have stuck their necks out and lapped up shares offloaded by foreign institutional investors (FIIs).

In August, domestic institutions bought stocks worth Rs 6,285 crore, the second-highest net investment in the last 24 months. The last time domestic institutional investors were net buyers was June this year, when they had bought shares worth Rs 8,427 crore.

This buying came at a time when FIIs continued their selling spree for the third consecutive month. They sold shares worth Rs 7,470 crore in August.

Local fund managers have reaped the benefits of buying when the chips were down, as benchmark indices have risen about five per cent in the last four trading sessions. This has also coincided with some stability in the rupee, which has gained after the central bank’s recent move to open a special window for the dollar needs of oil companies.

In August, mutual funds turned net buyers, the first time in the last 14 months, pumping in about Rs 1,000 crore.

Market participants said the sentiment had improved partly on talk Life Insurance Corporation (LIC) was buying. Though historically, LIC has been a buyer when FIIs were sellers, Dalal Street cheered the insurer’s purchases, as it was the largest domestic institutional investor. This could not be officially ascertained with LIC.

But analysts and fund managers warn against concluding the worst is over. U R Bhat, managing director, Dalton Capital Advisors, says, “Nothing has changed fundamentally and the last few sessions are showing merely a technical bounce-back. The worst is not over yet. Though there is some comfort zone, as crude corrected a bit, the situation remains what it was.” He added the rupee’s recent gain was temporary. “The rupee will go to 70,” he said.

After two consecutive days of gains, the rupee fell against the dollar on Monday, closing at 66.02 against the dollar, against Friday’s close of 65.71 a dollar.

Ritesh Jain, chief investment officer (CIO) at Tata Mutual Fund, said “Unless the rupee stabilises in a range, we expect the equity market will continue to remain volatile, despite the valuations turning attractive from a long-term investment perspective,” he said, adding since May, the global investor preference had distinctly shifted from developing economies to developed ones, particularly the US.

Navneet Munot, CIO at SBI Mutual Fund, is more optimistic. “The worst is over…Fears about potential impact from the tapering of quantitative easing by the US Federal Reserve are discounted, to a large extent. The pressure on the rupee is likely to recede from here. Foreign flows into equity and debt markets are likely to resume, as realisation sets in the event of quantitative easing tapering has already been priced into the valuation,” he said.