Market Balancing Act by Domestic Institutions

ECONOMY/ GOVERNANCE

• GS-2: Economy & Challenges
• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Market Balancing Act by Domestic Institutions

Context: Domestic institutional investors (DIIs) have emerged as a bulwark against foreign investors, which comes as a reassurance for retail investors in India. 

• When global markets witnessed a sell-off last week and foreign portfolio investors (FPIs) pulled out a net of Rs 30,255 crore ($4 billion) over eight trading sessions, DIIs counter-balanced this by emerging as net investors. 
• The lesson: long-term retail investors should follow domestic institutions and continue with their investments.

What led to recent volatility?

• Omicron Variant: Last week, amid panic over the emergence of the Omicron variant of the coronavirus, equity markets witnessed a global sell-off. 
• Fed Tapering: The markets were already under pressure because of the continued surge of infections in Europe, and their fall was also driven by anxiety that the US central bank may wind up its stimulus programme and raise interest rates sooner than earlier expected.
• Domestic Purchases Counter FII sell-offs: As top-line companies came under intense selling pressure, the benchmark Sensex at BSE crashed by 2,529 points, or 4.24%, to of 57,107.15 on Friday last week. But it recovered some lost ground this week and closed at 58,461.29 this week, as domestic institutions countered the FIIs’ sell-off with purchases.
  • Over eight trading sessions, the FPIs pulled out a net of over Rs 30,000 crore, and they were net sellers on each of these days. 
  • The DIIs —mainly banks, insurance companies and mutual funds —were net positive on each of these sessions, pumping in a net of Rs 24,363 crore.

What does DII inflow indicate when FPIs are selling?

• Continued investment by DIIs indicates that funds of retail investors are flowing into mutual funds and other market-related instruments.
• However, a lot of the investment by mutual funds in the markets is on account of rebalancing and investment in asset allocation funds or hybrid funds, as fund managers enhance the equity allocation following a decline in markets. 
• It also indicates the confidence of retail investors in the economy and growth, especially with an additional boost coming from the festival season and pent-up demand.
• Also, over the last seven years, mutual funds have emerged as a strong domestic investment category and have often played a counterbalancing role when FPIs have been selling. 
  • Reports show that Mutual Fund holdings in companies listed on NSE, which stood at 3.13% as of September 2014, have more than doubled to 7.36% in the quarter ended September 2021.

How should retail investors view this?

• A sharp expansion in the manufacturing purchasing manufacturers; index (PMI) for November, strong GDP growth data for the second quarter, and high GST collections over the last 3-4 months indicate that the economy’s fundamentals are on a strong footing. 
• While concerns over Covid remains, experts feel the current dips can be utilised to invest. 
• Oil prices have now come down and central banks are likely to delay the liquidity tightening due to the latest variant of Covid – Omicron.
• There is a notable improvement in the economy. When the market falls on global factors, which is the case now, it is a great opportunity to invest. 

What’s the source of DIIs’ funds?

• DIIs now act as a strong defence against the sell-offs by foreign players. Earlier, when the funds arsenal of DIIs was small, markets used to find it difficult to counter the actions of FPIs.
• Funds invested by DIIs are mostly from retail investors who contribute to various schemes of insurance companies and mutual funds. 
• Investors have pumped around Rs 3.90 lakh crore into equity schemes of mutual funds since January this year. 
• As a result, the assets under management (AUM) of equity schemes touched Rs 12.96 lakh crore as October 2021. 
• The participation of retail investors in securities markets has risen significantly especially in the last two years, which is evident from the increase in number of demat accounts, mutual fund folios and number of SIPs. 
• In 2019-20, on an average, 4 lakh new demat accounts were opened every month which increased to over 26 lakh per month in the current financial year. 
• If we look at number of mutual fund folios, in the beginning of FY 2019-20, total number of folios were 8.25 crore, which increased to 11.44 crore as on October 31, 2021.
• Insurance companies are also major investors in the market; they invest on a long-term basis of 10-15 years. LIC alone normally invests around Rs 50,000 crore every year.

Connecting the dots:

• US Fed Tapering
• Domestic Systemically Important Banks (D-SIBs)