As foreign funds flee amid global uncertainty, domestic investors seize the Nifty dip

On Monday, as the benchmark Nifty 50 fell nearly 2%, DIIs stepped in with net purchases of ₹2,936 crore, while foreign institutional investors sold ₹4,330 crore in Indian equities. Similarly, on Tuesday, DIIs purchased ₹3,031 crore of Indian equities while FIIs net sold ₹2,569 crore.

The MSCI India Index has pulled back by around 9% from its peak on 27 September, while the Nifty mid- and small-cap indices have corrected by about 7% and 5%, respectively.

“This market dip has opened stock-specific opportunities, as about 40% of the top 200 stocks are down by around 20%," said India Rewind, a monthly update by DSP Asset Managers.

“While the current week’s market activity may reflect some uncertainty surrounding the US election, any declines are likely to prompt DII buying rather than sell-offs," said Koushik Mohan, lead analyst at financial services firm Ashika Group. Mohan does not see a significant impact from profit-booking at this stage.

Also read | Record FII exodus shakes India’s stock markets even as domestic funds step up

Over the years, the landscape of market participants has undergone a remarkable transformation. The dominance of FIIs characterized the 1990s, the 2000s saw ultra-high-net-worth investors taking charge, and the rise of high-net-worth individuals marked the 2010s. In the 2020s, the market has become the realm of retail investors and DIIs, say market experts.

In October, DIIs purchased ₹104,876 crore in Indian equities, marking their highest monthly inflow since 2017, while FIIs net sold ₹87,590.11 crore of Indian shares. 

Several experts expect DII inflows to continue, with dips likely being viewed as opportunities to snag better investments.

Why are DIIs betting big?

Even with current high valuations, besides India’s growth potential, the periodic inflows DIIs receive are influencing their purchasing activity.

Mutual funds have been experiencing significant inflows through systematic investment plans (SIPs) and lumpsum investments. Dhiraj Relli, managing director and chief executive officer at HDFC Securities Ltd, explained that this is partly due to mutual funds deploying cash in the market when valuations become more attractive.

“Only when DIIs feel that they should now start to redeem larger amounts, or if the markets recover well and DIIs feel the need to raise cash again, we can see selling/profit-booking from them," Relli said.

Also read | FIIs pulling out of India is not a surprise. But where is their money going?

Jiten Doshi, co-founder and chief investment officer at Enam AMC, said DIIs are, by default, heavy on Indian equities and are “long-term investors with near-predictable inflows visibility in the short term".

Also, capitalizing on the megatrend of sustained financialization, increasing penetration, enhanced financial literacy, and a growing pool of investors, equities have become a favoured asset class among savers, he added.

“For the first time, medium-term returns are lower than (in) the last 5 years, and we do not expect any mass scale cancellations of these incremental flows in the short-to-medium term," Doshi said. 

However, the market could see sustained profit-booking from foreign portfolio investors in the short term, he said.

The road ahead: consolidation?

While valuations have moved up, Indian equities continue to remain exciting due to their long-term growth prospects, said Hari Shyamsunder, vice president and institutional portfolio manager–emerging markets equity India, at Franklin Templeton.

Also, India is at the beginning of a private capital expenditure cycle supported by strong corporate balance sheets and government backing, he said, adding that sectors such as financials, information technology, auto, construction, and consumer services presented stock-specific opportunities.

Overall, Indian markets have performed well in 2024, with the Nifty 50 rising by about 25% over the previous year. However, weak earnings, a potential economic slowdown, mixed consumption data, and sluggish capital expenditure have dampened sentiment.

Also read | Time has come to temper expectations on stock investment returns

“While the US cut interest rates in September, growth there remains strong, raising questions about the need for further rate cuts. In India, interest rate cuts could also be delayed as the RBI (Reserve Bank of India) monitors inflation stability," said Shyamsunder. “Additionally, geopolitical uncertainty persists. Given this backdrop, Indian markets may enter a period of consolidation in the short term."

Kkunal Parar, vice president at Choice Equity Broking, suggested that the equity market could retest a level around 23,300 points, which was last observed a day before India’s national election results on 4 June.

On Tuesday, the Nifty 50 gained 0.91% to end the day at 24,213.30 points.