DII August sell-off highest in 17 months, FII inflows near decadal high

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For the second straight month in August, domestic institutional investors (DIIs), including mutual funds, insurance companies and banks, remained net sellers in Indian equities, after massive net inflows in March when markets had crashed in response to the covid-19 led lockdown.

DIIs sold 11,727.66 crore worth of shares in August, the highest ever since March last year. Last month, DIIs had sold shares worth 10,007.88 crore as equity mutual funds saw a net outflow amid slow pace of monthly systematic investment plan (SIPs).

Even though benchmark indices have gained nearly 5%, it has largely been led by fresh flush of foreign money finding its way to emerging markets like India. So far this year, DIIs remain net buyers of Indian shares worth 46,646.63 crore.

According to analysts, the massive sell-off by DIIs in the last two month is due to various factors besides profit booking.

“Though few investors shaved-off a portion of their investment to reap gains of market rally, inflow into mutual fund schemes is declining. When equity schemes do not have inflow, allocation of funds into shares will be lower naturally. Also, post covid, most insurance companies are concentrating in selling protection schemes rather than ULIP (unit linked insurance plan) which by itself reduces direct investment into stock markets,” said an analyst on the condition of anonymity.

Another phenomenon that may have hit the flow of DII money is the influx of retail participation in shares, especially post lockdown by those willing to invest directly into stocks for quick returns rather than buy into a mutual fund scheme.

“Retail investors are enthusiastic about direct participation which explains outflow of funds from equity mutual funds while volume of retail trading is increasing,” Hemang Jani, head equity strategy, broking & distribution, Motilal Oswal Financial Services said.

India’s equity mutual fund schemes saw a net outflow in July, a first in over four years, as investors redeemed holdings. According to data from Association of Mutual Funds in India, July saw a net outflow of 2,480.35 crore, the first sell-off since March 2016. Net redemptions in equity mutual fund schemes rose to a four-month high of 16,622.01 crore in July, up 22.9% from 13,520.03 crore in the previous month and from 12,173.81 crore in the year-ago period. SIP inflow fell to 7,830.66 crore in July from 7,927.11 crore in June.

However, while DIIs have been selling shares, continuous flooding of foreign money into Indian equities pushed FIIs’ net inflows to $6.35 billion in August after a net purchase of $1.15 billion the previous month.

This is the highest purchase of Indian shares by FIIs since September 2010, when net inflows of FII money stood at $6.37 billion.

In calendar year 2020, FIIs have bought Indian shares worth $5.06 billion, despite risk-reward for Indian markets turning unfavourable with steep valuations and weak fundamental support for equities. Uncertainties amid the rise in covid-19 cases worldwide and escalating geopolitical tensions have also failed to deter foreign investors from parking their money in equities.

According to Jani, most of the foreign money that came to India over the last few days were due to fund raising activities by various companies, especially the banks and financial services entities. For instance, private sector lenders ICICI Bank, Axis Bank and Housing Development Finance Corp Ltd raised nearly 35,000 crore from institutional investors using the qualified institutional placement route in August.

Abundant liquidity gushing into markets worldwide including emerging economies is a function of loose monetary policies adopted by global central banks. Coordinated G7 central banks’ policy response by cutting interest rates to boost economies and prevent a large deterioration in financial conditions due to covid-19 has resulted in this abundance in liquidity flowing into equities.

Last Thursday, US Federal Reserve commented that its new monetary policy strategy aims for 2% inflation on average indicating that the US central bank’s key overnight interest rate, already near zero, will remain there possibly longer which bodes well for global liquidity flows into emerging markets.

“While the valuation is expensive, the Indian equity market may remain well supported due to several factors like better than expected earnings, low interest rate environment, and hopes of a vaccine. Interestingly, the Indian corporates have managed to successfully raise foreign capital that helps to de-lever balance sheets, instill confidence and also provide growth capital,” said Credit Suisse Wealth Management, India in a note on 14 August.

On Monday, Indian markets tanked over 2%, their steepest single day decline in two months, after news report suggested provocative military movements by China on the Ladakh Border. Investors are also gearing up for a change in trading norm from 1 September.

Securities and Exchange Board of India (Sebi)’s new norms on margin framework expected to disrupt trading volumes will kickstart from Tuesday.

The BSE Sensex closed at 38,628.29 today, down 839.02 points or 2.13%, while the Nifty closed at 11,387.50, down 260.10 points or 2.23%.

Ashwin Ramarathinam contributed to the story.

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