India’s market capitalisation recently crossed the $5-trillion mark, putting it on a par with the Hong Kong market. Becoming the world’s fourth biggest market is no mean achievement. Importantly, the rally from $4 trillion to $5 trillion came about in less than six months and was driven overwhelmingly by domestic liquidity.
While domestic institutional investors (DIIs) invested a shade over `2 trillion, foreign portfolio investors (FPIs) put in just over a fifth of that at close to `45,000 crore. FPIs have been playing a smaller role in India’s stock market. In fact, at 16.6%, the share of FPIs in India’s companies now stands at a 12-year low having fallen steadily since 19.9% in FY21; it was lower at 15.6% in FY12.
The dramatic increase in domestic investments into the stock markets, in the past couple of years, is reflected in the growing contributions by retail investors into equity schemes of mutual funds. Data from the Association of Mutual Funds in India shows that inflows to systematic investment plans (SIPs) have averaged `18,500 crore in the last 12 months or so, going on to hit a high of `20,371 crore in April. Between FY17 and FY24, money flow into SIPs has risen nearly five-fold to nearly `2 trillion with the number of investors at 87 million.
This is the result of a sharp shift in savings by households to financial savings — from physical savings — and in particular to equities. As Goldman Sachs has pointed out, there is an ongoing trend of financialisation of household savings, where within financial savings, allocations shifted from banks towards non-banks, especially into retirement savings.
The overall AUM or assets under management of retirement savings, insurance, and mutual funds rose at a compound annual growth rate of 15% over the last 10 years, outpacing the CAGR for bank deposits of 9%.
FPIs, for their part, have pared exposure to India in the last few years. They sold stocks worth over $17 billion and $6 billion in FY22 and FY23 respectively, but subsequently bought shares worth $25 billion in FY24. In 2024 so far, FPIs have sold a net $3.07 billion in India whereas the local institutions have risked some $25 billion.
The reason for this, as veteran fund managers point out, is the general disenchantment with emerging markets (EMs) as an asset class. This has been largely on account of the weaknesses in markets like China, Brazil, and South Africa rather than any specific dislike for the Indian market. Money has moved into the US where the S&P and Nasdaq have done well. Moreover, they believe Indian stocks are hugely overvalued and are also possibly staying light ahead of the results of the general elections. However, it is unlikely they will not increase exposure to India in the future given the sound macro-fundamentals and large universe of stocks.
At the same time, given how the allocation of savings by Indian households to non-bank assets is well below the levels seen in the developed markets and even EMs like Korea and Taiwan, increasingly more money is expected to flow into retirement savings over the next decade. The share of domestic liquidity being channelled into equities, therefore, could well trump FPI inflows into stocks. This will cushion the Indian market against sudden outflows of money, leaving it more stable.