Retail Investors: The Unsung Heroes Behind India’s Market Boom

The Indian stock market has been on a remarkable run, breaking multiple records in 2024 and sustaining a robust rally that began in the previous year. A key factor behind this stellar performance is the significant participation of retail investors, who have been driving the market’s upward momentum over the past three years. According to a report by Motilal Oswal, a leading domestic brokerage firm, the surge in retail investors’ savings pool, particularly in equities, has been a crucial force behind the unprecedented rise in India’s equity market.

The report highlights that the combined ownership of domestic institutional investors (DII) and retail investors in the free-float market has increased to 62.9% in March 2024, up from 55.1% in March 2014 and 58.7% in March 2019. This significant shift in ownership dynamics is a result of the influx of retail investments post-pandemic. Non-institutional investors now account for more than half of the cash volumes in FY24, marking a notable increase from 38% in FY14 and 49% in FY19.

The report also notes that total DII inflows in the first half of CY24 amounted to $28.5 billion, surpassing the full-year CY23 inflows of $22.5 billion. Cumulatively, from CY22 to the first half of CY24, FII flows have reached $4.8 billion compared to $83 billion from DIIs. This trend marks a reversal of the traditional narrative of retail investors in India, who were previously perceived as “buying at the top and selling at the bottom.”

Retail investors have been strategic in their investments, capitalizing on market corrections to increase their equity holdings. For instance, on June 4, 2024, they took advantage of market fluctuations to boost their equity holdings. The strong rise in the country’s mutual fund equity assets under management (AUM) is another indicator of retail investors’ growing influence. The AUM has risen from ₹1.9 trillion in March 2014 to ₹27.7 trillion as of May 2024.

The surge in demat accounts is another significant indicator of retail investors’ participation. The number of demat accounts has increased from 36 million in March 2020 to 160 million in June 2024. These factors, combined with robust earnings performance across India Inc., have propelled the country’s market capitalization beyond $5 trillion.

India now boasts a unique combination of “size and growth,” with a strong economy and a growing market. With the elections behind us and the return of the same Modi-led NDA dispensation and virtually the same cabinet to power, the brokerage anticipates policy continuity to drive the overall economic momentum further. The forthcoming Union Budget of the new government will outline the priorities for the next five years, with a focus on infrastructure, capex, and manufacturing.

The brokerage also expects the government to strategically utilize the extra windfall from the RBI dividend to provide relief to the poorer and middle classes and to encourage consumption ahead of the key state elections slated for October and November 2024. Overall, retail investors have been the key drivers of India’s market boom, and their continued participation is expected to sustain the market’s upward momentum.

Historical Context:

The Indian stock market has been experiencing a remarkable run since 2021, with the benchmark Sensex index crossing the 60,000 mark for the first time in October 2021. The market has continued to rise, breaking multiple records, and sustaining a robust rally. This surge in the market can be attributed to various factors, including the government’s efforts to boost the economy, the Reserve Bank of India’s (RBI) monetary policy, and the increasing participation of retail investors.

Retail Investors’ Role:

• Retail investors have been driving the market’s upward momentum over the past three years, with their combined ownership of domestic institutional investors (DII) and retail investors in the free-float market increasing to 62.9% in March 2024.
• The surge in retail investors’ savings pool, particularly in equities, has been a crucial force behind the unprecedented rise in India’s equity market.
• Retail investors have been strategic in their investments, capitalizing on market corrections to increase their equity holdings.
• The strong rise in the country’s mutual fund equity assets under management (AUM) is another indicator of retail investors’ growing influence, with the AUM rising from ₹1.9 trillion in March 2014 to ₹27.7 trillion as of May 2024.
• The number of demat accounts has increased from 36 million in March 2020 to 160 million in June 2024, indicating a significant increase in retail investors’ participation.

Key Points:

• The report highlights the significant shift in ownership dynamics, with non-institutional investors now accounting for more than half of the cash volumes in FY24.
• Total DII inflows in the first half of CY24 amounted to $28.5 billion, surpassing the full-year CY23 inflows of $22.5 billion.
• Cumulatively, from CY22 to the first half of CY24, FII flows have reached $4.8 billion compared to $83 billion from DIIs.
• Retail investors have been the key drivers of India’s market boom, and their continued participation is expected to sustain the market’s upward momentum.
• The brokerage anticipates policy continuity to drive the overall economic momentum further, with the forthcoming Union Budget outlining the priorities for the next five years, focusing on infrastructure, capex, and manufacturing.
• The government is expected to strategically utilize the extra windfall from the RBI dividend to provide relief to the poorer and middle classes and to encourage consumption ahead of the key state elections slated for October and November 2024.