Vivek Kaul: Will monthly SIP investors in Indian stocks keep calm and carry on?

Every seller needs a buyer. In October, to sell the volume of stocks FIIs wanted to, they were happy selling at prices lower than was the case in late September, when India’s stock market peaked. This was done to incentivize more buyers to enter the market and thus be able to sell.

But that’s a rather technical explanation. While FIIs sold stocks heavily in October, they have been less enthusiastic about investing in Indian equity for a while now. Since January 2022, they have net invested just $5.1 billion.

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Now, January 2022 might seem like a random cut-off point, but it isn’t. In the aftermath of the pandemic, the US Federal Reserve had begun a new edition of its quantitative easing (QE) programme. 

It printed money and pumped it into the financial system to drive down long-term interest rates and thus drive up economic growth. One impact was that large institutional investors, which FIIs basically are, began investing in stock markets across the world in search of higher returns.

The Fed had actually begun QE in October 2019, before the pandemic had started, because the American economy was getting into trouble at that point. It only doubled down post the pandemic. 

Between October 2019 and April 2022, when the QE programme peaked, the Fed had printed and pumped more than $5 trillion. After this point, the Fed has largely and gradually been withdrawing this money. 

While the Fed started reversing QE sometime in mid-2022, it had been suggesting it for a while before that. Hence, large institutional investors were discounting that possibility and expected interest rates to go up worldwide, and that was the context in which they pulled out money from Indian stocks from January to June 2022.

Given this, January 2022 is a reasonable cut off point for this analysis. As mentioned, between January 2022 and October 2024, FIIs net invested just $5.1 billion in Indian equities. 

In fact, as of December 2021, the total equity assets under FII custody had stood at $653.6 billion. This, as of September 2024, was $930.5 billion. This growth primarily reflects how pre-2022 equity investments have grown in value, as barely any new money has been invested.

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Again, this is not a clear and crisp story. While FIIs sold quite a bit in 2022, they bought a lot in 2023 and have barely bought in 2024. But the larger point is that since the Fed started quantitative tightening (a reversal of QE), which is gradually withdrawing the money it had printed, FIIs have slowed their investments in Indian stocks.

Stock prices have gone up primarily because domestic institutional investors (DIIs) have been betting big on stocks. DIIs typically invest money they collect from retail investors. 

That is, money invested in equity mutual funds (MFs), unit-linked insurance plans, the national pension system (NPS), Employees’ Provident Fund (EPF), etc.

From January 2022 to October 2024, DIIs have net invested a total of ₹9 trillion in Indian stocks. In rupee terms, FIIs have net invested just ₹56,261 crore during this period, implying that DIIs have invested 16 times what FIIs have.

Now, this is largely in line with how things have happened over recent years, with FIIs investing in years when stock valuations are relatively low and DIIs selling during those years, and vice versa. Of course, this isn’t true all the time, but is largely true.

In September 2024, when the stock market reached its peak, the price-to- book ratio, a measure of valuation, of the stocks that make up the BSE 500 index, which is a good representation of the overall Indian stock market, was at 4.35, a level that was last seen in 2007-08 and 2006-07.

So, with some benefit of hindsight, it’s logical to argue that FIIs were just taking some profits off the table after the market peaked. But why in October? Possibly because more lucrative opportunities opened up in China.

Now, how will things look going forward? In October, DIIs bought stocks worth over ₹1 trillion, their highest ever. This happened because DIIs, primarily equity MFs, were sitting on a lot of cash. 

If FIIs keep selling in the months to come, then this cash will cushion the fall in stock prices to some extent. But the more important question is whether retail money will keep coming in.

The money invested by the NPS and EPF is of a more permanent nature, but their inflows are also smaller. In fact, it’s the money coming in through equity MFs, primarily through systematic investment plans (SIPs), that remains perhaps the most important bit of the retail investment play.

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Since 2020, there has been a lot of talk about the Indian SIP investor maturing. Well, that maturity has never seen a fall in stock prices. Now it has, even though for a brief period. 

The question, then, is this: Will the Indian SIP investors keep buying stocks if the market continues to slide from here onwards? Indeed, that poser is the joker in the pack.