The Indian stock markets are currently facing a lot of volatility. From the highs of around 30,000 in the last week of January 2015, the markets are seemingly in a down trend. The reasons are many; earnings that were below expectations, the logjam in Parliament over key economic bills, the slowing down of the reform process, the FII taxation issue, etc. However, the main reason for the market fall is a different one.
As per an article in a leading financial daily, a well known foreign investor has shared some very interesting details. Did you know that the weightage given by FII to Indian markets relative to other emerging markets was the highest ever? India's weightage in the benchmark MSCI index is around 7.5%. At the start of the year, emerging market funds on average had invested over 12% of their corpus into India. It was an unprecedented overweight position! It is inevitable that a lot of this money will leave Indian shores for greener pastures. As FIIs hold 40-45% of the free float market cap of Indian stocks, we could be in for tough times ahead.
So who will pick up the slack? Believe it or not, it could be local investors! The data has already proven that retail investors are back in the markets. However, what is truly encouraging is the increasing participation of domestic institutions. It is no longer about LIC anymore. Indian mutual funds have invested about US$ 6.6 bn in FY15 the highest ever yearly figure in their history. Insurance firms are now slowly receiving funds again and will contribute to the buying interest. Then there is the efforts made by the government to allow the EPFO to invest a part of their corpus in to the equity markets.
We believe these moves could result in a significant counter weight to FII dominance of the Indian markets. In the long run domestic investors should take over the leadership position from FIIs. This would be a very positive development indeed. However, it will not happen overnight. So as the markets may experience volatility in the short term, ownership will certainly move to stronger hands in the long term.