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global markets: Impact of large retail inflows in the reduction of correlation between Indian and global equity markets

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global markets: Impact of large retail inflows in the reduction of correlation between Indian and global equity markets

Over the past year, India has seen a sustained and unparalleled selling by FPIs to the tune of $18 billion. At the same time, the primary market has enabled record equity fundraising by companies. Typically, a combination of these two events implies that the money available for the secondary market is low and the indices could drift lower

However, the year saw the index journey of close to 15,000 at the start of the fiscal to close to over 18,500 before the current correction set in.

This happened because of the continuous participation of retail investors in the market. We have been pointing out that this is structural. Higher retail participation is not the usual momentum seeking new entrants at the top of the market, although that too may be one of the factors.

This time around, the entry of retail coincided with the low of the market in March 2020 and market dips continue to be bought into.

If we look at the trend of new clients of net-based brokerages, they seem to be young digital natives in their mid-20s. This is a very good age to come to the market and build an equity portfolio in a healthy manner over a long period. The strong momentum in white-collar jobs, particularly in IT and other sectors further provides support to this trend. Retail is investing directly as well as through mutual funds. Equity mutual funds have seen record inflows.

If we look at examples of economies close to us such as Malaysia and Thailand, these countries have seen their MF assets increase from sub-10% and sub-15% of GDP to over 30% and 35% respectively, from 2000 to 2022, an increase of approximately 20%.

The growth in MF AUM has closely tracked the trend of per-capita incomes in these countries. As per-capita incomes have risen, people have been able to invest more in riskier assets.

In developed markets like the US, the MF AUM to GDP is over 120%. This same phenomenon is now taking place in India. As our per capita incomes are rising, the country is changing from a country of savers to a country of investors. If the policy environment remains stable and encourages equity exposure, then the growth could accelerate.


The next decade should see India delivering a strong growth. There is a great chance that from 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 incomes in the country to rise from just over $2,000 to over $6,000 over this period, a number close to where Thailand is at the moment (over $7,000).


This implies that the period of next 14-15 years should see our MF AUM to GDP increase from the current 16% to over 30%, an addition of over 1% of GDP per year in a combination of new flows and market action, and over both debt and equity asset classes.

Rs.37.6 trillion of assets could look close to Rs 150 trillion of assets over this period, a CAGR of 10%. Of the two asset classes, equities could grow faster than debt, given the higher return expectations from that asset class.

While these numbers seem large, they could prove conservative. Retail flows into equity MFs moved up from $12.2 billion in FY2008 to $27.4 billion in FY2022, while the journey saw a few sedate years as well. Asset allocation to equities in India is low to start with. Equities as a percentage of household assets have barely moved from 4.2% to 4.8% over FY2008 to FY2022. As India gets richer, this ratio should move into double digits.


A similar or stronger growth is expected in the assets of the Life insurance companies over this period. Direct investment of retail into the market would be over and above these investments into funds and insurance platforms.

It is this sustained strong flow of domestic money that has enabled the market to absorb the strong FPI selling and new IPOs while delivering positive returns. With FPI money becoming a smaller part of the market, the influence of policy making in the west should reduce over time and the direction of the market would be determined more by domestic participants.

Our earnings trajectory, our policymaking and the sentiment of our investors has started to matter more, as it should be. While the influence of foreign money would reduce over time (after the 2008 to 2014 period of strong inflows, we have seen FPI interest taper off), it is actually good news for FPIs also. This would enable them to invest in a market which is less correlated to the west and obtain diversification benefits.

(The author is Business Head and CIO of ASK Investment Managers Limited. The views and opinions expressed in this article are personal.)

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