When we look at how FIIs and DIIs are viewing the Indian market now, we get the feeling that both are investing in two different markets. Never before have we seen such divergence in their behaviour. Usually, it is liquidity compulsions that drive divergence in their behaviour. FII’s would buy very aggressively when they have high investment inflows and sell actively when the redemption pressure was relentless. Flows almost always decide their investment behaviour.
They are selling Indian equity almost relentlessly this year and the reasons seem to be more related to their valuation discomfort than anything else. They are more comfortable taking money out of India and deploying in other markets which they feel are relatively more attractively valued. The DIIs have a history of being the constant counterpart to the FIIs. They would give ample supply by selling Indian equities when FIIs pumped in too much capital even in overvalued markets. And, when FIIs sold at distress valuations, the DIIs would support the markets as effectively as they could. There were times when FII selling simply swamped the markets and could never be adequately matched by DII buying. In such situations the markets would see sharp corrections in short time lines.
Usually, DIIs tend to be cautious when they strongly believe in the imminent need to be conservative. Their investment flows would also not allow them to be too aggressive in deploying capital. When FIIs take a negative stance, the DIIs would be circumspect in their investment behaviour. They would hold back buying until the valuations become more attractive. The primary driver of their deployment speed would be their valuation comfort.
But, all that seems like history. The current confidence of the DIIs and their continuous deployment of capital in domestic equities seems driven more by their investors. The SIP book now runs in excess of Rs. 28,000 crores and the domestic funds receive monthly equity flows in excess of Rs. 30,000 crores. With so much liquidity directed at domestic equity mutual funds, they are feeling compelled to invest even if the valuations are a bit stretched. This is reflected in the elevated equity valuations in smallcap and midcap stocks. Investors feel there is no point waiting for a correction as the fear of missing out is elevated. Domestic retail investors would rather stay invested than take active cash calls.
This situation is testing the patience of the disciplined investor who would rather wait for valuations to reach his zone of comfort. The way domestic institutions buy aggressively into the dips induced by global events leaves very little room for the patient investors.
Liquidity is driving investor behaviour to the point of becoming despondent. The same liquidity is giving FIIs easy passage out of the Indian market. This is definitely abnormal for us. But, only time will tell us if it were the new normal too.