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After pumping in a huge $20 billion annually for the past three years, inflows from foreign investors are expected to get slower in the next financial year.
This is thought likely due to the imminence of a rise in US interest rates and the sharp correction in crude oil prices.
So, the market is hoping domestic investors will provide a cushion from the possible setbacks due to selloffs by foreign portfolio investors (FPI). These expectations have some basis. Domestic mutual fund (MF) houses have seen huge inflows in recent months, with a revival of investor interest in the stock market. Even insurance companies are seeing a good uptick in premium collections, after a slow start.
Equity MFs have seen a net inflow of nearly Rs 44,000 crore so far this financial year (it ends on March 31). And, domestic insurance companies are heading into their peak premium collection time, of January to March, which could give them enough to invest substantially in equities.
“Domestic investors are going to be better investors than the foreign institutional investors. Some of the domestic long-only funds are likely to see an increase in their investment corpus. We expect to see a large part of the allocation by these funds go into equities,” said Deven Choksey, managing director of K R Choksey Securities.
MFs have net-bought shares worth Rs 28,500 crore this financial year. Experts say fund houses are flush with cash, waiting to be deployed in the stock markets. “...while foreign flows have been strong, the big deal for Indian equities in the coming 12-24 months could be a sharp rise in domestic flows into equities,” went a report from Morgan Stanley titled, '2015 India equity outlook', issued earlier this month.
The trend has already started, say experts. In the eight trading sessions till Monday, domestic institutions have been net buyers of equities for Rs 4,500 crore, while FPIs have been net sellers at Rs 6,500 crore. On Monday, FPIs sold shares worth Rs 300 crore, while domestic institutional investors bought an equal amount, even as the benchmark indices rallied a little over one per cent.
The investment kitty of domestic institutions is expected to move higher on the back of a rise in domestic savings, in the wake of a cut in interest rates by the Reserve Bank of India. These haven't changed for a little over a year but could now edge lower. For, macro economic data such as growth, inflation and industrial production a continue to show signs of improvement.
An interest rate cut is expected to help lead to higher investments into equities, on the back of a surging market. Steadily rising real estate prices and weaker debt market yields brought on by lower interest rates could further deter investments into these asset classes, analysts said.
“As an offshoot of a bullish rise in real rates, flows into financial assets, notably equities, are also going up. Over the past five years, the share of financial assets in gross domestic product has declined by around 500 basis points and a mean reversion will not only boost demand for equities but make the balance sheets of commercial banks more liquid, a crucial input for the next credit cycle,” said a report authored by analysts Ridham Desai, Sheela Rathi and Utkarsh Khandelwal.
In addition, market analysts said that participation from rich oil-producing countries could also suffer a setback as the effect of lower crude oil prices reduces the investible surplus of the pension and sovereign funds from these geographies. Crude oil prices have fallen by about 50 per cent since June this year.
As per estimates from the U.S. Energy Information Administration, the Organisation of Petroleum Exporting Countries (OPEC) could lose about $257 billion in net oil export revenues.
