FPI, mutual fund inflows weaken; low institutional activity to keep stock markets range bound

After Sensex and Nifty surged nearly 49% since the last week of March till the beginning of August, helped by strong foreign fund inflows and hopes of revival, analysts say equity valuations are now expensive. With this, inflows from Domestic Institutional Investors (DII) and Foreign Portfolio Investors (FPI) have softened, which is further resulting in a consolidation phase for equity markets currently, said brokerage and research firm ICICI Direct. After having pumped in over $1.2 billion since May, FPIs inflows were at $6.1 billion into equity. In September FPIs recorded $0.8 billion in outflows.

ICICI Direct said that the sharp bounce back from March lows was in anticipation of economic normalization. “Current market behaviour of muted flows by institutional investors and the resultant consolidation in stock prices imply economic activity may plateau going forward after normalising to pre-Covid levels, which in our view, is a rational expectation,” the report added. India’s economic activity has been normalising and showing up in high frequency indicators such as PMI data, GST collection, electricity demand, improving exports, wholesale auto sales, among others.

“Expecting economic activity to rise beyond pre-Covid level without large fiscal and monetary stimulus would be erroneous as aggregate demand in the economy was already weak before the impact of the pandemic,” ICICI Direct noted. For calendar year 2020, FPI flows into debt are negative while equity flows have turned positive. On the other hand, DII flows are positive for the year but have significantly reduced from the levels of 2017-2018. Data shows that there was steady deployment from mutual funds since 2014, but since 2019 there has been a dip in flows. After buying massive quantities of equities in March and then some buying in May and June, DIIs have been registering outflows every month.

In the previous month, FPIs were largely sellers of domestic equity. They sold telecom stocks worth Rs 6,000 crore, followed by consumer staples worth Rs 2,500 crore. Consumer discretionary, energy, pharma, and IT stocks were the sectors that saw FPI inflows. Mutual funds, meanwhile, went shopping for defensive sectors. Telecom sector saw inflows worth Rs 2,500 crore from mutual funds. IT, consumer staples, and retail were the other sectors that saw inflows. Private banks, PSU Banks, consumer discretionary were the sectors that saw MF outflows.