Every trading day on Indian exchanges is shaped by a quiet contest between two very different groups of large investors, and recent sessions have shown that contest in sharp relief. Overseas funds have been steadily reducing exposure, while local institutions have kept absorbing shares on almost every dip. This push and pull helps explain why the Nifty 50 can fall sharply on some days yet find footing soon after. For anyone reading a Sensex Today update and wondering why the market keeps swinging despite strong domestic participation, the flow data offers many of the answers. Understanding who is buying, who is selling, and why can help investors make sense of moves that otherwise seem puzzling.
In This Article
- The Scale of Recent Foreign Selling
- The Steady Hand of Domestic Institutions
- Why the Two Groups Behave Differently
- The Net Effect on Index Levels
- Practical Takeaways for Retail Investors
The Scale of Recent Foreign Selling
The foreign institutional investors have been consistent sellers in the cash market in the last few sessions. On one occasion, they offloaded equities worth more than Rs 3,600 crore in one of the trading days. This has put downward pressure on the prices of heavily owned large-cap counters. The overseas funds tend to allocate funds to emerging markets on the basis of relative attractiveness. If the global bond yields rise or the local currency weakens, it becomes increasingly difficult for an overseas investor to justify the risk in Indian equities from the risk-reward perspective.
It is the currency that matters, as a weakening rupee reduces the returns of overseas investors on conversion of their profit into their own currency and accelerates their exit. The rising crude oil prices increase the risk as India is dependent on oil imports. Such a combination of negative factors has made the foreign investors more cautious as compared to earlier in the year.
The Steady Hand of Domestic Institutions
While the overseas money has been looking to exit, the domestic mutual funds, insurance companies and pension funds have been consistent buyers. They have been absorbing a significant share of the supply in the market. On days when the overseas investors have been heavy sellers, the local institutions have been able to buy about Rs 2,800 crore worth of shares. This has been one of the key strengths of the Indian market in recent times as it has reduced the historical dependence of the market on overseas capital. The source of this support can be traced to systematic investment plans as millions of retail investors participate and contribute regularly to mutual funds.
This money needs to be deployed in the market consistently regardless of their daily performance. The premiums of insurance policies and retirement plans add to this buying power of domestic institutions.
Why the Two Groups Behave Differently
The overseas players tend to take allocation decision on the basis of global macro scenario, currency outlook and relative attractiveness across countries and regions. As a result, they may be quick to take money out or onrush funds as and when the situation in these areas change. However, the domestic institutions have a more India centric outlook and a long-term investment horizon. The regular inflow of money in their schemes reduces their flexibility to shift to cash. It is this difference in the outlook that may explain why sometimes the two groups have been moving in opposite direction for a reasonably long period of time.
The Net Effect on Index Levels
When the domestic buying has been balancing the foreign selling, the indices have been range bound or moving downwards slowly. When the overseas funds have been selling heavily and domestic support has not been sufficient, the market has come under severe pressure as was witnessed in the wide-spread fall on Monday the market fell sharply. On the other hand, when both buyers and sellers were from the domestic front, the market moved sharply upwards. However, to understand the situation, it may be more relevant to look at the net position as compared to looking at buyers and sellers. The impact of the net selling by the overseas funds can be assessed on the basis of what has happened in the recent past.
The experience of the market shows that the foreign selling has been temporary as far as the long term goes. It is bound to reverse whenever the situation in the global economy stabilises or the Indian economic growth prospects have been found to be more attractive than the other emerging markets. There have been several instances earlier in the past where such phases of heavy selling by the overseas funds have been followed by substantial gains by the investors who have maintained their positions as investors who invested regularly through systematic investment plans were able to reap rich rewards.
However, as far as the present situation is concerned, history may not necessarily repeat itself. There is always a unique combination of factors that influence the movements of the market. For the present set of circumstances, the energy prices, global bond yield and the value of the currency are all important factors and the investors should remain cautious on the possibility of further selling by the overseas funds.
Practical Takeaways for Retail Investors
Retail investors can take some valuable pointers from observing the trends in the institutional flows. The first pointer is to pay attention to the flows in the system. However, daily flows should not be given much importance. The second pointer is to look at the consistency of the flows over a longer period of time. The longer this period stretches, the more relevant it is to judge the trends. The third pointer is to stay invested in the market as the systematic investment plans have the capacity to help investors as the unit price of the mutual funds gets adjusted to the lower price of the stock during such periods of selling by the overseas funds. Also, a well-diversified portfolio that does not have overexposure to the sectors preferred by the overseas investors will prove to be helpful to ride through such phases of uncertainty. Maintaining some liquidity in the portfolio may also prove to be helpful to meet any emergency if it arises in the meantime.
The movements in the rupee, crude oil price and the global bond yields in the coming weeks will provide some valuable insights into the future direction of the capital flows from the overseas investors.
At a Glance
- Overseas funds have been reducing their exposure in the Indian equity market, recently offloading equities worth over Rs 3,600 crore in a single trading day.
- Domestic institutions, including mutual funds, insurance companies, and pension funds, have consistently absorbed shares, purchasing around Rs 2,800 crore worth on days of heavy foreign selling.
- The weakening of the Indian rupee and rising crude oil prices have contributed to a more cautious stance among foreign investors regarding Indian equities.
- The dynamics between foreign selling and domestic buying have created a situation where the Indian market can remain range-bound or move downwards slowly.
- Retail investors are encouraged to focus on long-term trends of fund flows and maintain investments through systematic investment plans during periods of foreign selling.
- The historical pattern shows that heavy selling by foreign funds can be temporary and may be followed by substantial gains for long-term investors when conditions stabilize.
