Not FIIs, but retail investors may turn out to be the biggest headache for market – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/stocks/news/not-fiis-but-retail-investors-may-turn-out-to-be-the-biggest-headache-for-market/articleshow/92244885.cms

Synopsis

“Increasingly, the Indian market has been driven by local, not foreign flows. These local flows, in turn, had been driven by a shift away from fixed income as fixed deposit rates fell. That process, which made the equity risk premium on offer quite attractive, is in the early stages of reversing,” UBS Investment Bank’s chief strategist Bhanu Baweja told The Economic Times.

NEW DELHI: Retail investors have emerged as a force to reckon with on Dalal Street. Amid the brutal selloff by foreign institutional investors (FIIs), smaller investors have managed to cushion the fall, ensuring the downside in the market remained capped.

But now, many analysts are worried that the tide may turn.

Reason? The rising interest rate scenario and negative trailing 12-month returns could result in a slowdown of domestic flows, believe analysts, and this they say would possibly be a cause of worry.

The RBI hiked the key repo rate by 50 bps in the June meeting after a 40 bps hike in May. It clearly signals that good days are here for fixed deposit (FD) investors. While the transmission of hikes to FD rates will be slower, analysts say the possibility of them touching 7 per cent in the next 6-9 months cannot be ruled out.

“Increasingly, the Indian market has been driven by local, not foreign flows. These local flows, in turn, had been driven by a shift away from fixed income as fixed deposit rates fell. That process, which made the equity risk premium on offer quite attractive, is in the early stages of reversing,” UBS Investment Bank’s chief strategist Bhanu Baweja told The Economic Times.

During the pandemic, when the RBI had slashed repo rate, FD rates of leading banks had touched as low as 5-6 per cent. Amid the backdrop of a lack of better investment avenues, retail investors turned to equities in hordes. This is evident by the fact that over 2 million demat accounts have been added every month since 2020.

Now, if the RBI’s repo rate rises potentially towards 6-7 per cent, it creates a serious headwind for the equity market, Baweja added. The evidence so far is sketchy, but we are already seeing the run rate of flows away from fixed income into equity diminish, he said.

Echoing similar views, Ajay Srivastava said the biggest risk to the market to my mind is not anything but the fact of the movement of domestic investors from SIP investment to FDs and that is the trajectory whenever rates reach a critical point of 8-9 per cent.

Lately, the dismal performance of the Indian equity market amid global stocks selloff on US Fed rate hike expectations and rising inflation has also dented the appeal of the stock market for investors.

On Wednesday, the US Fed approved its biggest interest rate hike since 1994, lifting the target federal funds rate by 75 basis points. Fed officials also see further steady rises this year.

The benchmark Nifty50 is down nearly 16 per cent since the highs it touched in October 2021. At the same time, Nifty Midcap 100 and Nifty Smallcap100 are down 19 per cent and 28 per cent, respectively.

While so far the mutual fund numbers have remained pretty strong, Jefferies head of research and MD Mahesh Nandurkar said, “Interactions with the investors reveal that when the trailing 12-month returns began going into the negative territory, that is the time when retail investors begin to get worried about the market returns. We are probably almost at that point or maybe we will hit that point in the next few weeks.”

We cannot take the retail investor flows for granted and that has been supporting the markets for so long, Nandurkar added.

Jefferies’ top strategist predicts zero returns for the Indian market even over the next 12 months.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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