Foreign Portfolio Investors (FPIs) have been the most dominant force in the Indian stock market, at least since the mid 2000s. In fact, the impact of FPI flows until a few years back was so severe that market participants used to often use the phrase “When the US sneezes, Indian stock market catches cold” to explain market corrections led by FPI outflows.
FPI’s share of NSE listed companies’ free-float market cap (valuation of publicly held shares) has ranged between 35-45% over the past 15 years or so. While they still continue to own about 37% of the free-float market cap, their dominance seems to be reducing in recent years. FY 2021-22 is a case in point when the Indian equities witnessed the highest ever FPI net outflow of over US$ 18 billion. However, the impact of such outflow on our stock market was quite muted compared to what was seen during such phases in earlier years.
What has led to such resilience in the stock market?
If there’s one strong reason for this change, it is the emergence of retail investors in the Indian stock market. Over the past decade or so, Indian retail investors’ equity investments have increased substantially, mostly indirectly via mutual funds. The monthly mutual fund SIP inflows have increased from approx ₹2,000 crore a decade back to over ₹17,500 crore in December 2023. This has resulted in domestic mutual funds being regular buyers in the market, helping counter the impact of FPI outflows.
Moreover, in recent years, especially post covid, the number of retail direct investors in the stock market has also grown dramatically. The number of demat accounts have gone up from about 40 million in March 2020 to almost 140 million in December 2023, leading to a significant increase in the number of retail investors transacting in the market every month.
The monthly active investors in the cash segment of the NSE have increased from an average of 2.5 to 3 million pre-covid to 9-10 million in recent years. As a result, in calendar year (CY) 2020, the direct retail investors in the stock market turned net buyers for the first time in 11 years and have continued to be net buyers in CY 2021, CY 2022, and CY 2023 so far.
To put this into perspective, during the two year period from January 2021 to December 2022, the total net buying from direct retail investors in the NSE’s cash segment was to the tune of ₹2.27 lakh crore as compared to an overall net outflow of about ₹95,000 crore from FPIs during the same period.
In fact, this direct net inflow from retail investors was almost at par with net inflow of about ₹2.58 lakh crore in equity mutual funds during this period. Such huge and consistent net inflow from retail investors directly and indirectly (via mutual funds) has brought about the necessary stability in the Indian stock market, reducing the influence of FPI flows.
What can we expect in the coming years?
With the magnitude of inflows from retail investors seeing a massive jump over the past decade as compared to increase in FPI flows, domestic mutual funds and direct retail investors’ combined free float ownership of NSE listed companies has now increased to over 37% vis-a-vis less than 25% a decade back. Further, given that the country is at an inflection point in terms of per capita income, the trend of increased retail inflow is bound to strengthen in the coming years.
Moreover, easy access to capital market products, industry stakeholders’ increased focus on investor education and changing attitude of young investors towards equity investment are all likely to fuel the growth in retail investor participation in the market, driving retail flows higher. The role of FPIs, therefore, is only expected to dilute in the years to come and if this trend holds for a sustained period, our stock market may be well on its way to become Atmanirbhar.
—The author, Nilesh D Naik, Heads the Investment Products, Share Market, at PhonePe Wealth, a leading stock broking firm. The views expressed are personal.
(Edited by : C H Unnikrishnan)
First Published: Feb 29, 2024 10:27 AM IST
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