Global Markets: The impact of large retail flows in reducing the correlation between Indian and global stock markets

Over the past year, India has seen sustained and unprecedented sell-offs by foreign investment institutions to the tune of $18 billion. At the same time, the primary market made it possible for companies to raise funds on record. Typically, a combination of these two events indicates that the funds available to the secondary market are low and that indices can drift lower

However, the year saw the index journey nearly 15,000 at the start of the fiscal year to close to more than 18,500 before the current correction.

This happened due to the constant participation of retail investors in the market. We have indicated that this is structural. Rising retail participation is not the usual momentum looking for new entrants at the top of the market, although that could also be a factor.

This time around, the retail entry coincided with the March 2020 market dip and dips continued to be bought in the market.

If we look at the trend of new clients for internet based brokerages, it appears that they are young digital natives in their mid-twenties. It is a very good age to enter the market and build a healthy stock portfolio over a long period. Strong momentum in white collar jobs, particularly in IT and other sectors provides further support for this trend. Retail is direct investment as well as through mutual funds. Equity mutual funds saw record inflows.

If we look at examples from economies close to us like Malaysia and Thailand, these countries have seen their microfinance assets increase from less than 10% and less than 15% of GDP to more than 30% and 35%, respectively, from 2000 to 2022, an increase of nearly 20%.

The growth in microfinance assets under management closely follows the per capita income trend in these countries. As per capita incomes rise, people are able to invest more in riskier assets.

In developed markets such as the United States, MF management to GDP is more than 120%. This same phenomenon is happening now in India. As our per capita income rises, the country changes from the country of savers to the country of investors. If the policy environment remains stable and encourages exposure to equity, growth can accelerate.


The next decade should see India achieve robust growth. There is a huge chance that out of a $3 trillion economy, we cross $5 trillion by 2027 and then double up to $10 trillion over the next 10 years. This would enable per capita income in the country to rise from just over $2,000 to over $6,000 during this period, a number close to where Thailand is at right now (more than $7,000).


This means that the next 14 to 15 years should see our microfinance department to GDP increase from 16% currently to more than 30%, plus more than 1% of GDP per year in a mix of flows and new market procedures, and on both classes of debt and equity assets.

37.6 trillion rupees in assets would appear close to 150 trillion rupees in assets during this period, at a compound annual growth rate of 10%. Of the two asset classes, equities can grow faster than debt, given the higher return expectations for that asset class.

While these numbers sound large, they can be conservative. Retail flows into ETFs rose from $12.2 billion in fiscal 2008 to $27.4 billion in fiscal 2022, while the journey has seen a few quiet years as well. Asset allocation to equities in India is initially low. Equity as a percentage of family assets has barely moved from 4.2% to 4.8% during FY 2008 to FY 2022. As India gets richer, this ratio should go into double digits.


Similar or stronger growth in the assets of life insurance companies is expected during this period. There will be more direct investment by individuals in the market than these investments in funds and insurance platforms.

It is this continued strong influx of domestic funds that has enabled the market to absorb strong FPI sell-offs and new IPOs while generating positive returns. With FPI money becoming a smaller part of the market, the influence of policy making in the West should diminish over time and the direction of the market will be further determined by local participants.

Our earnings trajectory kicks in, our policy making and our investor sentiments are more important, as they should be. While the effect of foreign money will decrease over time (after the period of strong inflows from 2008 to 2014, we saw a decrease in interest on foreign portfolio investment), it is actually good news for foreign investment institutions as well.

This will enable them to invest in a market that is less tied to the West and get the advantages of diversification.

(The author is the Head of Business and Chief Information Officer at ASK Investment Managers Limited. The opinions and opinions expressed in this article are personal.)

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