Blasé Capital Us vs THEM

A leading business newspaper did an interesting calculation. It stated that foreign institutional investors sold equities worth more than INR2.23 lakh crore in the secondary market in this calendar year (January 1-December 14). This worked out to a net selling of INR900 crore a day based on the number of days the stock exchanges were open. In other words, it translated into sales of just over INR150 crore an hour based on the number of hours they were open. Such a pace, added the newspaper, had never been witnessed before, ever since foreign investors were allowed to directly invest in Indian equities. There were days, weeks, and months when hectic selling took place. But it was never so sustained, regular, consistent, and continuous over nearly 12 months. During this year, there were moments, and short periods of net inflows. The overall trend was outwards.

However, the broader indices remained relatively stable despite periods of high volatility, and regular uncertainties. The net outflows by the foreigners were more than matched by the domestic inflows, especially by retail investors largely through mutual funds, which invariably invested in the secondary market. The small investors pumped in huge sums in IPOs (Initial Public Offerings) through the year, and especially in the past 2-3 months. Listing gains in the IPOs were common, and some shares were listed 50-60 per cent higher than the offer prices. For example, while foreigners sold INR16,000 crore worth of equities in this month, the domestic investors bought shares worth INR40,000 crore, or two-and-a-half times the former figure. Experts contend that domestic inflows have consistently been INR30,000 crore a month for the past three months. One of them dubs the pattern as foreigners versus domestic “tug of war.”

What does this mean? Are the foreigners smarter, or know something about the Indian equities that the local investors do not? Or is it that the domestic investors have more faith and trust in equities? As far as the foreigners are concerned, they are driven by three factors. One, they regularly book profits, and invariably have target sale prices in mind. The moment they achieve it, they vamoose. While the larger institutions invest for a longer period, others like hedge funds, which are more driven by quarterly returns, buy-and-dump regularly. When the sale decisions of the two converge, there is madness in the markets, and the herd mentality takes over. Two, the foreigners are dictated by safety. Whenever they see threats, or feel that the safer US market offers decent returns, money flies away from the emerging markets like India. Three, the foreigners take macro and fundamental data seriously. Any instability, and they are gone, even if they return quite fast, and within weeks or months.

In the case of the Indian retail investors, they are generally the last ones to join the equity party. They wait until stock prices are already high, and then jump in because either they see their friends, relatives, and neghbours making money, or they are gripped by FOMO, and do not wish to lose out on the opportunities. Although many of them burnt their hands, and legs, during the pandemic bust, the Indian indices have gone up by more than three times since then. Thus, the small investors have seen massive returns accrue to those who stayed invested, and had the patience. Now that the stocks are rising across the large-caps, midcaps, and small-caps spectrum, the retail investors feel that the party will go on. During the past few years, they have come to believe that mutual funds are the safest, and the least risky instruments, which offer substantial returns on the upside. They have thronged to the markets like never before.

One needs to examine two more factors that are likely to play out in the future. The first is that the foreigners will return, as they have in the past, as soon as there is good news on the Indian economic horizon. This can be in the form of the India-US trade deal that may be inked within weeks or a few months. It will ensure that the current 50 per cent tariffs will come down, even as India will need to open its market for American imports. This will change the growth trajectory immediately, and positively impact the trade deficit. It will aid private investments even as the Government feels compelled to ease public investments to manage the fiscal deficit. External factors like an end to the Russia-Ukraine war, and the easing of the western sanctions on Russia will help India, which is being forced to limit crude oil imports from Russia. Oil prices are likely to come down.

On the domestic investors’ front, there are a few under-the-radar changes. Despite the overall inflows, the retail investors have begun to sell in the secondary market, and invest in IPOs, where they see better returns. This means that the mindset may change in 2026, and there may be less inflows through mutual funds in percentage terms, even if the overall inflows remain positive. If the stock indices go up, or if the prices of certain stocks go up, even the domestic investors, who possibly entered late, will begin to book profits. This will put pressure on overall inflows. One will need to watch these two sub-trends to determine whether they converge or diverge.