Domestic Investors: Key Factor Driving The Stock Market

In India, in today morning Sensex started at around a record 57,807 points, and Nifty at 17,197 points, continuing the past few days' affirmative trends. The Indian equity market is getting support from the global market, the Dow Jones Industrial (DJI) index has shown a consistent sharp rise from August, 20 and on August 27 (Friday) it reached a record 35,455 scale. Hang Seng (Hong Kong) and Nikkei (Japan) are also showing a similar trend. However, India's equity market is now expected to maintain this trend, as the economy has started to recover at a considerable pace, in addition to other significant reasons. So, what are the possible reasons that the market is getting stronger?

Why is the market getting stronger?

The Indian equity market is triggered by domestic indicators like recovery in Purchasing Managers Index (PMI), improving employment rate revealed by CMIE survey, development in the macro-economic situations, growth in production/manufacturing, and positive GDP figures. Control in the domestic Covid positive cases and increasing vaccination drives have aided the market.

The key factor behind a strong market in India has been the positive sentiment of the Domestic Institutional Investors (DIIs) rather than the foreign portfolio investors (FPIs). In last year, when the pandemic was at its peak, even then, DIIs did not lack hope from the market and poured money. They invested more than Rs. 55,000 crore since March 2020, although the stock market went through a steep correction because of the sudden strict lockdown. It continued till March-April, 2021, even when the FPIs started to sell off. In April, DIIs have invested a net of Rs. 9,669 crore, against an outflow of Rs. 11,101 crore by FPIs. The DIIs in August has also invested around Rs. 8,078 crore in domestic equities and have Rs. 46,940 crore since April, this year.

FPIs, on the other hand, has invested around Rs. 986 crore in August - triggering renewed interest in large-caps. According to NSDL data, "FIIs have net invested Rs. 14,137 crore in the Indian market in June so far. They had taken out Rs. 8,836 crore in April and Rs. 1,958 crore in May from the Indian market." So, the DIIs overtook the FPIs' net investments, largely. Hence, this proved that the domestic investors became far more resilient than ever before and learned to look at the stock market with a long-term gaze - a significant component of the Indian equity market.

Mutual funds and Systematic Investment Plans (SIPs), among others, remained strong throughout. During April-July, 2021, mutual funds made net equity purchases of Rs. 32,155 crore, which reflected an increased inflow of funds by retail investors. SIP account registrations were at a record high of around 2.13 million in June, while in March, there were 1.67 million accounts - exhibiting a great improvement in 3 months. The knack for SPIs has been growing among investors, and it has almost doubled from the last two years' average of 1.12 million accounts. The young population has also been one of the key driving forces in the stock market.

However, worries about the potential third wave of the Covid pandemic might hurt the market a bit, especially for foreign investors. But a controlled CPI inflation in the domestic ecosystem (like in July 5.6%) and a soft global crude oil price, coupled with restricted Covid cases, will further boost the equity market for domestic investors.