New Delhi, January 15: The belief that domestic investors are now the driving force behind the market movement is denied in a recent report by the financial service company Nuvama.
Post the pandemic foreign institutional investors have poured money into Indian equities but their overall ownership in the market has declined.
The report by Nuvama says that the perception that domestic investors are driving the market doesn't reflect the underlying reality. As a current account deficit country, India relies on FII inflows to maintain macroeconomic stability.
It said, "FIIs' Indian equity ownership has dropped, spurring a belief that domestic investors now sway markets. Factually correct, but far from reality. India is a current account-deficit country and needs FII flows to fund it and secure macro stability".
The report also added that these flows are crucial for funding the current account deficit, ensuring surpluses in the balance of payments (BoP), and maintaining liquidity in the banking system.
FIIs also play a pivotal role in driving risk appetite in the market, which, in turn, encourages domestic institutional investors (DIIs) and supports rallies in small and mid-cap stocks (SMIDs), even if DIIs have limited direct exposure to this segment. To borrow from Orwell, while all capital flows are important, FII flows remain "more equal" than others.
Over the past six months, the report added that the three key factors have shifted market dynamics, first the slowing domestic demand. The report added that the household credit growth has moderated, and government spending has softened, leading to weaker domestic consumption.
The earnings downgrades also affected, the report added that margin pressures have intensified as earlier tailwinds faded, and subdued demand has accelerated downgrades in earnings per share (EPS) for Indian companies. This has brought Indian corporate earnings in line with global peers.
The strengthening of US dollar and increasing US Treasury yields have triggered FII outflows. This has resulted in a domestic liquidity deficit, reminiscent of the 2018 scenario.
The report noted that these developments have halted India's market outperformance, particularly affecting SMIDs and cyclical stocks. Historically, corporate earnings closely follow demand trends.
The report said, "Historically, demand and earnings have been tightly correlated; however, India Inc.'s restructuring (costs control, balance sheet improvement) ensured improvement in margins, despite weak top lines".
While domestic investors have become a strong pillar of market stability, FII inflows remain indispensable for sustaining economic momentum and market confidence.
