Behind the boom: How supply dynamics are fuelling market peaks
Even as newspaper headlines celebrate equity mutual fund inflows surpassing ₹45,000 crore in June, with systematic investment plans (SIPs) exceeding ₹21,000 crore (growing 9x in the last 10 years), we should remain cognizant that like any true market, equities have two sides to the equation–demand and supply.
As demand remained strong and price (valuations) moved up, supply has picked up. June witnessed company promoters and private equity (PE) firms selling stakes worth ₹60,000 crore.
Frontline indices have also been hitting record highs and market capitalization has surpassed $5 trillion.
Market multiples have expanded, primarily due to the growing domestic demand for equities. Inflows from SIPs and equity contributions from pension schemes such as Employees' Provident Fund (EPFO) and National Pension System (NPS), and insurance are estimated to grow by ₹3.3 trillion ($40 billion) annually.
The less frequently discussed factor is the “supply" side of the market. Adam Smith’s proverbial invisible hand responds to an increase in demand and price with an increase in supply. This is now visible in the Indian market as well.
The multiples at which companies are now trading are attracting more private companies to list, prompting strategic investors to take profits, and encouraging both local and multinational promoters to divest.
In the last 15 months, promoters sold ₹1.86 trillion and PEs ₹1.15 trillion, in addition to ₹1.8 trillion of initial public offerings (IPOs) and qualified institutional placements (QIP); aggregating to ₹4.84 trillion, outpacing the ₹3 trillion net inflows into MFs.
The supply is only set to accelerate. Upcoming quarter’s IPO volumes are 3X of Q1FY25, with an IPO pipeline of ₹93,000 crore. The
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