Domestic institutional investors stabilise stock market volatility amid FII sell-off

New Delhi: As foreign institutional investors (FIIs) resorted to big selling in the cash market this week amid weak global cues, domestic institutional investors (DIIs) played a stabilising role in mitigating volatility and supporting market confidence, experts said on Saturday.

Additionally, the increasing participation of domestic retail investors through mutual funds strengthened the market's internal support system, fostering a more stable investment environment, said Alok Agarwal, Head, Quant and Fund Manager, Alchemy Capital Management.

The selling in the cash market by FIIs amounted to Rs 19,544 crores in the first four days of the week. However, on Friday when the market stabilised, FIIs tuned buyers, though for a limited amount of Rs 406 crore.

Since the end of 2020, FIIs have net bought equity worth Rs 1 trillion compared to mutual funds, which have bought Rs 6.2 trillion.

With six times more net buying, domestic institutions are becoming far more relevant in the last few years.

According to experts, the domestic funds are bullish on the Indian markets due to several factors.

“This resilience is attributed to the robust economic growth of India, effective monetary policy by the central bank, and record inflows from retail investors,” said Agarwal.

According to Sunil Damania, Chief Investment Officer, MojoPMS, despite global negative news, the Indian stock market has demonstrated remarkable resilience.

Unlike previous trends, retail investors are now using market dips as opportunities to increase their equity allocations, said Damania.

Foreign Portfolio Investors (FPIs) typically pursue valuations. Currently, India’s valuations are at a premium compared to the historical premiums of other emerging markets.

“Last year, the Indian market saw record inflows from FPIs, leading to expectations of muted inflows this year. The average monthly inflows from FPIs in 2024 were Rs 15,000 crore, which has come down to Rs 4,000 crore year-to-date in 2024,” Damania added.

Domestic funds have greater confidence in the long-term growth story of India, driven by sectors like manufacturing, pharmaceuticals, and renewable energy. The growing financial literacy and an increasing investment culture among Indians have boosted fund inflows, further fuelling market optimism.

“India is a unique large country with stability in government along with double-digit economic growth, double-digit corporate earnings growth and double-digit corporate return on equity (ROE). FIIs can’t remain out for a long period of time,” the experts maintained.