Indian stock markets have witnessed much volatility in recent times on account of global factors that directly affect the inward and outward flow of foreign institutional investment. In such an environment, strong domestic institutional investors (DII) can act as a good counterweight. As reported in FE on Friday, Life Insurance Corporation (LIC) has made a significant (Rs 61,436 crore) investment in Indian equities in the last financial year, which is almost 50% more than what it had put in Indian equities in 2008-09. In contrast, net investment by FIIs in India equity markets was Rs 1,10,744 crore in 2009-10. Strong participation by LIC in the equity markets will send out a positive signal and encourage other domestic institutional investors to invest in the Indian equity markets. In fact, when FIIs pulled out about Rs 1,12,500 crore from the Indian markets after the collapse of Lehman Brothers in 2008, DIIs, namely banks and insurance companies, pumped in about Rs 81,000 crore to rescue the markets. Although DIIs cannot yet match the overall strength of foreign institutional investors, their gradual rise bodes well for retail investors in the future, as stronger inflows from domestic institutions will make the markets better placed to absorb any shock of FIIs selling in the future. Besides, better quality flows from domestic institutions will signal a more long-term investment approach towards Indian equities. Moreover, improving trade volumes of both DIIs and FIIs will also help to bring down the cost of transactions in the Indian markets and help better price discovery of stocks in the future.
The Indian markets have been absorbing huge inflows from FIIs since the middle of last year as they have given one of the best returns amongst all emerging markets because of strong domestic factors and the earnings momentum of corporate India. Numbers show that foreign investors have preferred either registering with the capital market regulator or routing their investments through registered sub-accounts. From 1,200 registered FIIs and 3,644 sub-accounts at the end of December 2007, the number, as on May 2010, has increased to over 1,706 FIIs and 5,377 sub-accounts. However, there has been a perceptible change in the quality of these flows?from an average of 45% in 2007, participatory notes now account for only about 16% of the total assets managed by FIIs by end-2009. This suggests that even FIIs are looking longer term. Domestic institutional investors must play a significant role in supporting this long termism.