In the five years from FY 2010 (the financial year ending in March 2010) to FY 2014, foreign portfolio investors (FPIs) purchased close to USD 90 billion in Indian equities, providing steady support to the market. Over the same period, domestic investors were net sellers of an estimated USD 7.4 billion in Indian equities (according to CSLA, September 2015), taking equities as a proportion of total Indian household assets down from 4% to only 2.2%.
The tide is turning
This situation is now changing. Since Narendra Modi became prime minister at the May 2014 general election, retail investors have turned net buyers of Indian equities, pouring a cumulated total of USD 19.2 billion into Indian equity mutual funds as of end of August 2015. This represents 16 consecutive months of inflows, averaging USD 1.2 billion per month. As foreign investors’ flows have been more muted so far this year at USD 5 billion, this pick-up in domestic investment is providing strong support for the equity market.
Exhibit 1: Net inflows in equity mutual funds have turned positive since May 2014
Source: CLSA, Bloomberg, RBI, ACE Equity, CMIE, SEBI, September 2015
Favourable drivers supporting further domestic inflows
Indian domestic investors are being encouraged by a number of favourable drivers. Over the last few years, high inflation had led domestic investors to favour physical assets such as property and gold, which today represent 70% of total household assets. With inflation now well contained and real rates having turned comfortably positive, financial assets have regained their attractiveness, while physical assets have lost some of their appeal. The property market has been under pressure from slowing property price appreciation and weakening demand, while over the past three years average gold prices have fallen by 12% from their FY 2013 average.
Even after the strong inflows from domestic investors over the last 16 months, equities still represent less than 3% of Indian household's total assets, which stand at USD 6.8 trillion, and thus well below the level of 4.6% in FY 2008.
Exhibit 2: Equities only represent 2.7% of Indian household's total assets
Source: CLSA, Bloomberg, RBI, ACE Equity, CMIE, SEBI, as of March 2015
Indian household savings are expected to grow by USD 400 billion a year. Assuming 5% of households’ incremental savings were to go to equities – as was the case over FY 2005-2009 – this would represent total retail equity inflows of USD 20 billion per annum, which would strongly support the Indian equity market.