Capital flows running out of steam as DIIs taper after FPIs

After some relief was seen in April when the pace of FPI selling eased as central banks across the world announced stimulus packages, both local and foreign investors seem to have run out of steam.

By Urvashi Valecha

Domestic institutional investors (DIIs) came to the rescue in March when foreign portfolio investors were selling down Indian shares as they started taking risk off the table.

Domestic institutional investors nearly matched the selling by foreign portfolio investors (FPIs) by buying stocks worth Rs 55,595.18 crore against the foreign outflow of $8.3 billion in March. But experts believe that flows from domestic institutions are also tapering.

After some relief was seen in April when the pace of FPI selling eased as central banks across the world announced stimulus packages, both local and foreign investors seem to have run out of steam with flows from DIIs tapering in May.

Domestic institutions typically step in as buyers when there is heavy selling by FPIs.

In March, India’s stock markets witnessed their worst crash since 2008, with the Sensex and Nifty falling as much as 38.07% and 38.4%, respectively, from January highs. During this period, the markets received support from DII-buying. But that fizzled out in April when they sold equities worth Rs 824.73 crore as selling pressure from FPIs eased and markets recovered from their lows.

In April, FPIs sold $30.5 million worth of equities, while in May so far they have sold stocks worth $963.97 million. Keeping pace with the FPI selling, domestic institutions have bought stocks worth Rs 10,388.67 crore but market experts believe that local flows, too, are drying up.

Vinod Karki, vice-president, ICICI Securities, said, “The key reason for the tapering in DII-buying has been the rapid rise in stocks which led to the fading of the risk-reward ratio of equities to some extent. The DIIs have also been a little apprehensive about the outlook on financials, which has weakened a lot and bulk of price decline in the markets is because of them.”

With mutual funds seeing redemptions from high net worth individuals and insurance companies not witnessing adequate business growth in the March quarter, flows coming from domestic institutions have declined.

Banks, which also invest in equity markets, are hesitant to put in funds since bond yields have fallen.

Deepak Jasani, head of retail research, HDFC Securities, said, “DIIs include mutual funds, insurance companies and banks. We have not seen a good amount of flows coming in through MFs so their buying would be restricted, March month was not good for insurance companies in terms of business growth due to lockdown, although traditionally it is the best month and so the flows have tapered from their side. Banks are hesitant to put in money in equities in volatile times since bond yields have fallen and they have been getting a good run on bonds, so for the month of April and May, fresh inflows have not been so good.”

The only wall of support in domestic markets is nearly Rs 8,000 crore plus of retail money coming into mutual funds through the systematic investment plans (SIPs). While mutual funds continue to see redemptions by high net worth individuals (HNIs), SIPs remain steady on a monthly basis.

Gopal Agrawal, head of macro strategy and senior fund manager, DSP Mutual Fund, said, “In April, we had seen some redemptions partially from high net worth individuals on the lump sum and SIP side, the number in May is likely to be the same until and unless the situation improves dramatically. If one sees with the repo rate being 4%, banks’ fixed deposit rates have come down and gold being at the high level of around Rs 49,000 per 10g there is no alternative left for investors to get returns except equities.”

Experts believe that completely exiting the lockdown will determine the direction of mutual fund flows going ahead.

Deepak Jasani of HDFC Securities said, “The inflows will depend on when the lockdown is completely lifted and whether there will be some stability in the market because of that. The lifting of the lockdown will help DIIs including the MFs and insurance companies to collect fresh funds. On the other hand, FPIs may continue small selling and may not turn bullish on India till the prospect of economic growth recovers.”

Data from Association of Mutual Funds in India (Amfi) with its last update shows that in April, fund net inflows into equity schemes dropped to a four-month low.

The net inflows were at Rs 6212.96 crore. The flows into SIPs equity schemes were at Rs 8,376 crore in April, but, going ahead, market experts are of the view that flows into SIPs will remain unaffected. Vinod Karki of ICICI Securities said, “SIP flows will remain relatively unaffected because the savings in equities are not a broad-based phenomena and are confined to a select group of investors who believe in long-term prospects of equities as an asset class and comprises a very small part of the household savings. Also, resilience in stock prices of quality stocks has not broken the confidence so far.”