Are our markets now completely in sync with global markets? Or are we seeing FII selling even though global markets are showing strength? The answers are fairly obvious. FII selling in Indian markets is unabated. On days when the markets open higher, we see sharp selling that quickly erases the early gains.
The Domestic Institutional Investors (DIIs) have so far held the markets from falling badly. But their capacity to absorb FII selling is dependent on the inflows received by them. So far, they have managed to cushion the fall in our markets by absorbing the selling at lower levels. Market stability is a critical factor for sustaining investor sentiment. Even if the markets fall sharply in one trading session below 15,000 on the Nifty, we could see the sentiment significantly weaken. This will create a ripple effect in selling by domestic retail investors.
Retail investors have a relatively lower pain-bearing capacity, and most investors haven’t experienced prolonged bear markets. They have seen sharp falls and quick pullbacks. A market that falls continuously and stays at lower levels for extended periods of time will test the patience and temperament of newer investors to equity. This seems like a very distinct probability, and it may be very difficult to avoid such a phase. But such a phase will be a great opportunity for discerning investors to consistently participate in equity investing, increase their asset allocation to equity and achieve the necessary scale in their portfolios.
Investing in boring times can help an investor reap rich rewards when the markets turn very exciting. Flows can give investors a great opportunity to buy especially in times of aggressive selling by FIIs. When the DIIs stop supporting the markets, these opportunities are likely to become even juicier.
Clearly, the game of flows played by domestic and foreign institutions can change very quickly. The impact of the flows will decide the directions of markets from here. Investors must use the opportunity to invest when there is a rise in market volatility.