Domestic Institutional Investors Rescue Indian Equities Amid FII Outflows

Amid ongoing selling pressure from foreign institutional investors (FIIs), domestic institutional investors (DIIs) continue to provide crucial support to the Indian equity market, according to a recent report from Motilal Oswal Financial Services Ltd (MOFSL).

In recent months, FIIs have sold equities worth approximately $13 billion during October and November. This correction has led to a cooling in the valuations of large-cap stocks, even as mid and small-cap stocks still command higher multiples.

In November alone, DIIs managed to record inflows totaling $5.3 billion, while FIIs faced their second consecutive month of outflows, amounting to $2.2 billion.

For the calendar year 2024 to date (CY24 YTD), FII outflows from Indian equities stand at $2.1 billion. This starkly contrasts the inflows of $21.4 billion that were recorded in the entire year of 2023. On the other hand, DIIs have shown remarkable resilience with inflows of $58.9 billion in CY24 YTD, significantly higher than the $22.3 billion seen in 2023.

MOFSL has stated that its model portfolio reflects a strong belief in both structural and cyclical opportunities in the domestic market. The portfolio is currently overweight in sectors such as Information Technology, Healthcare, Banking, Financial Services & Insurance (BFSI), Consumer Discretionary, Industrials, and Real Estate. Conversely, it is underweight in sectors like Metals, Energy, and Automobiles.

Over the past few months, the Indian stock markets have seen a correction of about 8% from their peak during September to November. This downturn can be attributed to several factors including earnings moderation and high valuations in mid and small-cap stocks, as well as global influences like geopolitical uncertainties in the Middle East and a surging dollar index.

In November, the Nifty index showed a slight decline of 0.3% month-on-month, following a more substantial decrease of 6.2% in October. This marked the second consecutive month that the Nifty-50 closed in negative territory, reflecting significant volatility in the benchmark index, which fluctuated around 1,274 points before settling 74 points lower.

Historically, mid-cap stocks have outperformed large-cap stocks by an impressive 127% over the last five years, while small-cap stocks surpassed large-cap stocks by 121%. Following a healthy 21% compound annual growth rate (CAGR) from FY20 to FY24, corporate earnings have slowed down in the first half of FY25, according to the report.

India, Equities, Investors