Domestic Funds Cushion Indian Stocks Amid Risk-Offs As Hot Money Exits

Domestic investors have shielded the Indian stock market from heavy crashes this year and helped it remain resilient, while overseas funds have pulled out money amid any negative sentiment.

Even the global market veteran Christopher Wood of Jefferies agrees that Asia's fifth-largest stock market had been driven by domestic money.

During the five biggest market falls this year, domestic investors have bought stocks when hot money exited in huge quantities. In four of the five instances, domestic investors bagged nearly 50% worth of stocks sold by global funds, aiding in a sharp recovery and a follow-up rally thereafter, according to the data compiled by NDTV Profit.

The one instance where domestic investors bagged little stocks was during the election shock that saw Prime Minister Narendra Modi win by an unexpectedly slim margin. During this steep fall, Indian stocks recorded the fastest recovery from a drop of more than 5% in the last decade, with domestic investors using the selloff to buy the dip, according to Bloomberg.

Apart from the election shock, domestic mutual funds picked up most of the stocks that foreign institutions sold during major risk-off sentiment.

Reflecting on the recent global rout triggered by the unwinding of yen carry trades and expectations of aggressive rate cuts by the US Federal Reserve, Wood said the domestic market was much more resilient amid a selloff in the global market.

Indian stocks are the only market with unambiguously healthy demand for equity in the context of the PE industry’s monumental pipeline of investments to sell globally, he said in a note.

Even on the day of the Union Budget and the day after, overseas funds offloaded over Rs 8,000 crore, while the domestic institutions pocketed over Rs 4,500 crore. This is despite the measures proposed by the Finance Minister to up the long and short-term capital tax gains along with the securities transaction tax.

Since the budget on July 23, foreign institutions have sold stocks worth over Rs 34,500 crore, while local funds have bagged stocks worth nearly Rs 40,000 crore during the same period.

The FPI investment has been inconsistent recently, alternating between buying and selling, according to VK Vijayakumar, chief investment strategist at Geojit Financial Services. "This is in sharp contrast to the consistent buying by DIIs. The developments in the US economy and global markets in the coming days will set the trend for FPIs in August."

Despite the fall in the Indian stocks on Friday that wiped out Rs 5.5 lakh crore in the Nifty 50 companies on Monday, the benchmarks showed recovery on Wednesday buoyed by retail flows.

Even amid negative global news, the Indian stock market has demonstrated remarkable resilience, according to Sunil Damania, chief investment officer, MojoPMS. "This resilience is attributed to the robust economic growth of India, effective monetary policy by the central bank, and record inflows from retail investors."

Strong inflows from retail investors are pressuring fund managers to invest in the equity market, leaving them with limited alternatives, Damania said.

Foreign portfolio investors typically pursue valuations and currently, the valuations in India are at a premium compared to the historical premiums of other emerging markets, he said.

So far during the year, while overseas funds have bought equities worth Rs 24,455 crore, they are tilted more towards the debt side, having bought Rs 94,880 crore worth of sovereign paper.

India's benchmark indices—the NSE Nifty 50 and the S&P BSE Sensex—have risen 11.5 and 9.7%, respectively, making them the sixth and seventh best performing Asian indices.