Bullying the Indian Equity Markets

Written by: Rahul Uppal, MBA 1st Year, Financial Markets Practice (FMP)
CHITKARA BUSINESS SCHOOL
Date: October 14, 2017

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

The Nifty hit a fresh all-time high on Friday, 12th October 2017 as encouraging domestic economic
readings and optimism in major global markets lifted sentiment. Nifty ended up 71.05 points, or 0.7%,
at 10167.45 its highest closing after hitting an intraday peak of 10191.90.

Also, Indias primary market had set a record in terms of money raised through initial public offerings.
Indian firms had raised about Rs 52,125 Cr. ($8.2 billion) through IPOs this calendar year versus Rs
37,535 Cr. in 2010, taking the country to the third spot behind US ($35.77 billion) and China ($34.8
billion). The stocks of the companies which launched their IPOs in 2017 are being traded on an average
margin of 39.17%, with some of the stocks experiencing a growth of around 200%.

At this point its very important to ask, whats keeping the trend going?

Currently, the Indian economy is going through a blooming phase, even though some major policies
were put in place by the Indian government like the revolutionary tax regime; GST, which has replaced
many indirect tax laws that previously existed in India and another major game-changing move i.e. to
scrap the 500 and 1000 denominations in order to fight corruption and curb black money. The
economy did observe a little setback as the GDP growth fell to 5.7% in the first quarter of the fiscal year
2017-18, but that had no effect on the Indian Equity markets which can be seen through the change in
price level of Indian stock market Index BSE SENSEX which had observed a rise of 17.8% over the past
year and currently trading at levels of 32,000.

Over the past year, FIIs (Foreign Institutional Investors) have sold equity shares worth Rs 1,241,574.09
Cr. and purchased worth Rs 1,243,877.88 Cr. and in the past couple of months, FIIs have been selling
equity shares owing to expensive valuations and lack of earnings recoveries. According to the data,
foreign institutions have sold shares worth Rs 27,941.5 Cr since August 1, 2017. While domestic
institutions have been buyers to the tune of Rs 44,280.85 Cr. The continued inflows from domestic
institutions helped absorb the selling by their overseas counterparts. As much money the FIIs are
pulling out of the Indian Economy, DIIs (Domestic Institutional Investors) are taking charge and buying
whatever is being sold at the current price level which is already at its peak.

It's a day of records for FII sales and DII purchases ~ Economic Times-28-Sep-2017

FIIs continue to sell equities in October ~ Indiainfoline-07-Oct-2017

Markets see largest one-day FII pull-out of Rs 5300 Cr. ~ Business Standard-28-Sep-2017
 Figure 1: FIIs action in the past year

Graph 1: Relationship between SENSEX and FII Inflows

We can see from Graph 1 that there is a relationship between the Net FII inflows and the BSE SENSEX.
Though the impact of Net inflows is not recognized simultaneously, but it can be observed over the
period of time. There is an upward trend in the SENSEX when net FII inflow is positive and a downward
trend when net FII inflows are negative. This might give an idea about the relationship between the
two.

If the equity markets consolidate at current levels, there is a huge possibility of panic among the
investors as they invested in the market owing to the gains in the market observed so far. In such
situations people tend to exit the market bearing losses and as the word spreads everyone is selling,
pulling down the markets to the levels where bulls like FIIs take charge again looking at the opportunity
to book profits at the cost of domestic investors.
So, unless the Government and RBI actually have solid plans for the economy to boost GDP,
Employment and encourage the business environment and growth, the situation might see downward
pull and we might experience massive recovery in the Equity markets.

This article is intended to create awareness about investing, to invest in value and not the face i.e. to
study fundamentals of the company before investing any money in that company. And once you find a
company worth your time and money, all you have to do is sit tight and be patient. Only a handful of
investors have been able to decipher the complexity of stock markets and make profits.

"Investing should be more like watching paint dry or watching grass grow. If you want excitement,
take $1000 and go to Las Vegas." - Paul Samuelson