Are Indian stock markets turning domestic?

When the global headwinds became stronger and foreign investors started losing faith in Indian equity markets, it’s the domestic investors who filled the void. Their belief in India’s growth story, and in its strong economic fundamentals appeared unshakable.

A research report by Morgan Stanley says that since 2015, the holdings of foreign portfolio investors (FPI), in a sample of 75 Indian companies, have declined about 230 basis points (bps) to 24.8 per cent, while domestic mutual funds (MFs) have increased their stake by 580 bps to 9.5 per cent and individual investors by 157 bps to 9 per cent in the same period.

The FPI selling has been brutal since October last year. During the nine-month period since October, the investors net sold equities worth Rs 2.56 trillion, owing to a series of factors including geopolitical uncertainties and tightening monetary policy across central banks. In the June month alone, FPIs pulled out over Rs 50,000 crore, making it the worst sell-off in nearly two years. However, the tide turned in July as foreign investors turned net buyers, investing Rs  5,000 crore in Indian markets.

But the FPIs selling in the recent past cannot be the only reason why domestic investors came out on top. Let us take a larger sample. That of 1,770 NSE-listed companies for which the shareholding patterns are available.

So, in these companies, the share of domestic institutional investors (DIIs) along with retail and high networth individual (HNI) investors in the NSE-listed companies reached an all-time high of 23.53 per cent as of June end, according to data from primeinfobase. Domestic investors include domestic institutions such as mutual funds, insurance companies and pension funds etc.

The share of mutual fund holdings in Indian companies climbed to 7.75% in FY22 from 4.99% in FY17, while that of insurance companies and institutional investor LIC has declined during the same period.

The massive inflow of retail investors into the equity markets via Systematic Investment Plan or SIP and other routes has also contributed to the rise of domestic investments. According to the data available, there are about 55.5 million mutual fund SIP accounts through which investors regularly invest. Since FY17, SIP contributions have nearly tripled to Rs 1.24 trillion as of FY22.
 

The SIPs’ assets under management (AUM) climbed to Rs 5.76 lakh crore at the end of FY22, growing over 30 per cent annually in the last five years, according to data from Association of Mutual Funds in India. Retail investors total ownership in stocks climbed to 7.42% at the end of FY22 from 6.79% in FY17.

In addition, India’s pension fund EPF investments since 2015 in equities have ensured steady inflows into the markets. The EPFO had invested around Rs 1.23 trillion in exchange-traded funds (ETF) as of FY21. It has also invested in a pool of public sector companies over the years.

So, will this trend sustain? And is it a good sign that markets are not too dependent on foreign investors, who were once touted to be the “price setters”? Given their growing clout, Morgan Stanley has even handed over the tag to domestic investors.

Experts say that FIIs’ shareholding in Indian companies will rise over a period of time, given their relative under-allocation to India. At the same time, domestic investors' shareholding will continue to remain strong. And it all bodes well for the market.