Worst of Times Best of Times

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It is the worst of times, it is the best of time. The current situation of the Indian stock market reminds us of these famous words. We are witnessing interesting dynamics in equity markets. Institutional investors are considered informed investors that make decisions after thorough research. So it is believed that they have a good grasp of what is going on in the market. Now, institutional investors can be segregated in 2 buckets. Domestic Institutional Investors and Foreign Institutional Investors. Recently it is being witnessed that FIIs are pulling away while DIIs are pouring in. If all of these are informed investors then why are their actions poles apart? Let’s try to decode it. 

Let’s start with FIIs outflows. FIIs offloaded Rs 14,768 crore in September. As on 16th October, 2023, FIIs sold net shares worth Rs 593.66 crores. At the same time, DIIs pumped in Rs 1,184.24 crores. This outflow can be attributed to fact that after considering risk, US markets appear to be more attractive than Indian markets. 

Why are American Markets attractive at present? 

• US Bond yield currently at 4.7%.
• Fed has expressed the possibility of another rate hike, while completely ruling out a rate cut 
• US’s retail inflation inches to 3.7%, up from 3.6% in the month before, further solidifying the need to hike rates.
• US unemployment rates also went up slightly to 3.8%, but remained significantly low compared to 25-year historic levels, indicating tightness in the economy. 
• Geo-political tensions in Europe and the Middle-east (Russia-Ukraine, Israel-Hamas) have further driven investors towards safe havens like the dollar. 
• US Dollar Index presently at 106.35, indicating greater appeal for US Dollar 

Why are Indian markets losing lustre?

• India’s high reliance on imported crude oil from middle-east has discouraged investors, now crude oil prices are soaring up, thanks to conflict in the middle-east. If Iran gets directly involved in this conflict, it is expected that crude oil prices will shoot up further, hampering India’s economic interest.
• El-Nino has caused significant weather disruptions through lower, uneven rains impacting the rural Indian economy and creating inflationary pressure on food prices. Investors perceive that Nifty is currently over priced.

Why DIIs are pouring in?

Why, then, are domestic institutional investors pouring in money into the economy? Mutual fund cash holdings are at a 16-month low, at 4.8% in September. Investors continue to pump money in the markets, with SIPs and mutual fund AUM touching all-time highs last month. This is compelling domestic institutional investors to further channel this money into the equity markets. 

In September, the mutual fund industry’s net assets under management (AUM) touched Rs 46.57 crores. Mutual fund folios also hit an all-time high of about 15 crores. Amongst these, retail folios, which majorly consist of equity, hybrid and solution-oriented schemes, also registered an all-time high of 12.5 crore, as opposed to 12.3 crore the month before. In another notable feat, the number of unique investors in the Indian mutual fund space crossed 4 crores. 

Contributions via SIPs also stood at an all-time high of Rs 16,042 crores, along with the number of new SIPs registered, which were a staggering 36,77,157 for September, 23. The SIP AUM also rose to Rs 8.70 lakh crores last month, as compared to Rs 8.47 lakh crores in August, 23. 

If DIIs do not invest these funds, it will adversely impact their NAVs. So, they have no choice but to invest in the markets, despite various headwinds.