While many lament the extreme dependence of Indian equity markets on global factors, the phenomenon may have something to do with the disappearance of the long-term retail investor.
According to market data, at present, foreign institutional investors account for chunk of the long-term 'sticky' investments in the country's equity markets.
The data also show that daily trading was mostly carried out by domestic players, most of whom do not carry over their investments even into the next month.
For example, over the last one year, there has been a steady selloff by retail investors, which was lapped up by FIIs and mutual funds.
During the period, retail investors were net sellers of Rs 31,700 crore (Rs 317 billion) on the two major exchanges in the country, while FIIs and mutual funds increased their exposure by more than Rs 62,000 crore (Rs 620 billion), including primary market purchases.
"After the Sensex touched 6,000 more last year," says Jayant R Pai, vice-president for institutional equity at Parag Parikh Financial Advisory Services, "Many retail players were selling
and selling. They had never seen such rates and they thought it was better to cash their investments."
However, despite the selloff by retail investors during the last one year, more than 75 per cent of the total turnover was still accounted for by retail investors and brokers.
FIIs and Mutual Funds, which, as a class, account for nearly all the buying support that took the Sensex to new since late last year, account for just around 20 per cent of the total delivery-based buying and selling on the BSE and NSE everyday.
The dominance of day-to-day traders and the absence of genuine long-term investors to counter-balance FIIs have led to a high degree of dependence on the latter's actions and, in turn, on global events.
"The players in all major markets are the same now," Pai points out, "and retail investors are not a big enough to withstand the effect of FII selling.
Mutual funds too have to anticipate redemption pressures that may start piling up after any market downturn. As a result, markets don't have the depth required to withstand selling by foreign players."
