FPIs, DIIs or retail investors? Who will dominate markets in 2023?

As per NSDL data, year-to-date, foreign portfolio investors (FPIs) have broadly been net sellers in Indian equities despite substantial buyings recorded in the second half of the current year. Overall, FPIs outflow in the equities market is around ₹1,21,642 crore from January 1st to December 27th, 2022.

Meanwhile, as per Stock Edge data, foreign institutional investors (FIIs) made record selling to the tune of ₹2,74,033.26 crore in domestic equities year-to-date.

On the other hand, the data also revealed that domestic institutional investors (DIIs) were the biggest investors so far in 2022 with inflows of a record ₹2,73,543.82 crore in domestic equities so far in 2022.

In December 2022 bulletin, RBI stated that amidst bouts of volatility, domestic equity markets touched a string of new highs during November, supported by rising expectations that domestic inflation may have peaked. Higher foreign portfolio investor (FPI) flows amidst improved risk sentiments and a less hawkish US Fed also helped the markets. During the first half of December, markets have moderated amid increased uncertainty regarding the future Fed policy path following stronger-than-expected US payroll data. Overall, the BSE Sensex increased by 2.4% since the start of November to close at 62,182 on December 09, 2022.

Further, RBI’s bulletin highlighted that prior to the fresh peak reached on December 1, 2022, the Sensex had achieved another all-time high of 61,766 last year on October 18, 2021, which was aided by the gradual reopening of the world economy after the tapering of the delta wave of the COVID-19 pandemic and rising vaccination rates. Since then, inflationary concerns, aggressive monetary tightening, and the raging geopolitical conflict in Ukraine have halted the rally in the Sensex.

Also, the bulletin said that a closer comparison of the two peaks shows that the current peak is distinguished by lower expected volatility (VIX) and relatively moderate valuation multiples.

Furthermore, the bulletin said that the current peak has been accompanied by the underperformance of the broader indices. Similarly, institutional investor activity highlights the increasing prominence of a net domestic institutional investor (DII) flows over those of FPIs. The trajectory of rising retail participation in equity markets has remained resilient, gauged by the rising number of Demat accounts which reached 10.6 crore in November 2022.

Year-to-date, both Sensex and Nifty have gained by nearly 3% each. On December 1st, the Sensex touched a lifetime high of 63,583.07 and the Nifty 50 hit a historic high of 18,887.60. However, markets corrected drastically from their peak levels after that due to recession fear, the US Federal Reserve’s indication for more rate hikes, and renewed concern of the Covid outbreak.

Currently, markets are in recovery mode. On Tuesday, Sensex inched closer to the 61,000 mark to end at 60,927.43 and Nifty 50 soared above 18,100 levels to close at 18,132.30.

Who will dominate 2023 in markets?

According to ICICI Direct’s report, at every market fall, the average monthly investment by domestic mutual fund investors is higher compared to the preceding months. Similarly, when markets recover or rally, investors put in a lower amount.

The stock brokerage also highlighted that domestic institutional investors (MF + EPFO + insurance) are likely to be a dominant force, going forward as well. In the last 12 months, DIIs have bought equities worth ₹3.1 lakh crore.

Since October 2021, when the Nifty made all-time highs, FPIs have been net sellers to the extent of around ₹1.6 lakh crore. The brokerage added that despite such significant selling, headline indices breached all-time highs. The resurgence of domestic investors has been the highlight of the Indian capital markets in the last few years.

Going forward, the brokerage said, the year 2023 is likely to see domestic institutions and retail investors becoming the mainstay of the Indian equity markets in terms of structural liquidity support during any sharp market fall.

However, on FPIs, ICICI Direct’s note said that despite outflows of over $16 billion during the year so far, domestic flows have helped India to outperform the rest of the world.

“While we believe the resilience of the Indian markets may continue due to domestic funds, inflows from FPIs should provide sharp momentum as seen since July 2022. Moreover, considering continued outperformance, India’s share in FPI money is likely to increase further in CY23,” the brokerage’s note added.