Although the latest market rally is deemed to be driven by strong buying activity by foreign investors, it is optimism on economic turnaround that is doing the trick. Data compiled by FE show that even as the benchmark indices have rallied close to 21% YTD, making India one of the top-performing markets in the world, the foreign purchases of Indian stocks is less than or in line with their buying activity of the last two years. In the year so far, FIIs have acquired around $8.8 billion of Indian stocks with nearly 40% of the inflows coming in the last one month since election outcome akin hopes added close to 3,200 points to the 30-share Sensex. However, the YTD buying is $6.3 billion below $15.1 billion purchases observed in the same period last year, during which the Sensex remained flat notwithstanding bouts of upside moves in the months of February and May. Even in 2012, the net inflow for a similar period was in line with the buying activity observed in 2014 though the benchmark index had rallied just about 8% in the first five months of 2012. One reason for the divergence in the FII flow and the market performance could be the outstanding comeback of the mid-cap and small-cap stocks in 2014 .
While investors shied away from this equity pack in 2013, the revival in market sentiment after the Narendra Modi-led BJP government came in power is well reflected in the remarkable YTD gains made by mid-cap ( 37.7%) and small-cap (52.5%) indices on BSE. Increasing number of market experts, including FIIs, have announced the upside potential in mid-cap companies, especially in the cyclical sectors which are considered to be the primary beneficiary of the expected reversal in business sentiment and economic activity. Given that generally, retail and domestic institutional investors are drawn to smaller companies, the turnaround staged by these stocks may as well mean that retail investors are back in the market. However, data fail to corroborate this argument completely. Although brokersí estimates show that retail turnover in the cash market jumped to R11,854 crore in May 2014, a three-and-half-year high, at 47%, its contribution in the total turnover remained in line with last year. Even DIIs have remained net sellers during the most part of the year and have sold stocks worth