Indian stock market rally – will it continue?

As mentioned, the maximum gains in the Sensex came during September, October and March – coinciding with months of high net inflows from FIIs. In fact, March 2014 clocked the second-highest monthly inflows from FIIs in FY2013-14, after May 2013.


FIIs have been a significant driver in the Indian markets over the last few years. Net inflows into equities from FIIs during the last five fiscal years (FY2009-10 to FY2013-14) have been $1.1 trillion, $1.1 trillion, $0.4 trillion, $1.4 trillion and $0.8 trillion respectively.

Bloomberg data on global funds with India allocation of over 3% show that the maximum funds are geographically diversified, with a broader Asia-Pacific mandate rather than a pure India or BRIC mandate. This indicates a preference to diversify country risk during a challenging economic climate.

Within FY2013-14, the second quarter saw a few months of net outflows by FIIs from Indian markets on the back of the US Federal Reserve tapering news.

Moreover, expectations of a recovery in the US economy led to possibilities of an end to its easy monetary policy, which might have reduced the yield differential between the US and emerging markets and thus, led to some capital allocation back to less-riskier markets.

The FIIs returned to India in a big way in the second half of the year as a new governor for India’s central bank brought fresh hopes. Also, there was stability in some macro numbers and in the INR. Troubles in some other emerging markets also kept interest in India alive, relatively speaking.

While the depreciation in the INR made news this year, currencies of other emerging markets (across continents) and export-oriented countries also fell. Some currencies like the Thai Baht, Indonesian Rupiah, Russian Rouble, Brazilian Real and South African Rand fell further than the INR, impacting returns for foreign investors.

Month-on-month Sensex Returns vs FIIs net inflows

Foreign Inflows in Indian Stocks

Source: BSE, SEBI

Various currencies’ exchange rates vs USD (rebased to 100)

Emerging Market Currencies Peformance



While FIIs are now the second-largest holders of shares in some Indian companies after the promoters themselves, the activity by domestic institutions (DIIs) and retail investors remained in sharp contrast.

DIIs have seen net outflows from equities for the fourth successive year, largely led by redemption pressures from equity mutual funds which have seen net outflows since the last nine consecutive quarters.

The Indian mutual fund industry lost 1.5 million investor folios (a fund folio contains the investor’s holdings in the schemes of a fund house, much like a bank account) within the first six months of FY2013-14. Within this, the equity fund segment lost about two million folios.

Direct interest in equities from retail investors also remained sluggish over the past fiscal year. High interest rates, volatile equity environment and stagnant income growth meant most Indians preferred low-risk alternatives like fixed income, bank deposits etc.

With primary market activities like IPOs/FPOs drying up as a result of a near-freeze in the capex/investment cycle, the growth in new accounts created have also been lower as compared to earlier years.

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