FII flows may revive, yet market momentum leans on domestic investors, Budget

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, the market's momentum largely hinges on the actions of domestic institutional investors (DIIs) and the proposals in the upcoming Budget. FIIs net sold ₹146.29 crore worth of equities between 1 January and 2 July, while DIIs were net buyers, pouring in a staggering ₹2,40,627.19 crore during this period.

The strong trend in DII flows, which began post-demonetisation in 2016, has intensified over the past few years due to a broader investor base rather than just a shift from physical assets like gold and real estate to financial investments. Mutual funds (especially SIPs), direct equity investments, and contributions to insurance and pension funds, along with strong market performance, have underpinned these inflows.

Jay Kothari, global head - international business, DSP Asset Managers, said, “The average flows of DIIs since 2016 is ~$14 billion per annum (last three years average is $26 billion) vs FPI flows at ~$5.4 billion, and that highlights the strength of domestic flows." He believes this trend is structural, so domestic flows are unlikely to drop dramatically despite the volatility led by geopolitical, macroeconomic or recent election outcome. Also, investors now buy on dips, a behaviour change seen over the last 8-10 years, he noted.

Some proposals in the upcoming Budget might influence market flows in certain ways, especially if the government decides to tweak the capital gains tax regime that currently favours equity investments. “We think changes in long-term capital gains is possibly the only key negative that the investors may be worried about, as far as the budget is concerned," said Saion Mukherjee, managing director & head of equity research, India, Nomura.