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The bull’s pillar: FIIs are no longer the dominant influence. Household savings in equities are the new deal

These 25 stocks in BSE500 index rose 10-60% in 5 days

The financial year, which will draw to a close this week, represents an inflection point for the Indian equity market. So far in 2021-22, foreign portfolio investors (FPIs) have been net sellers of equity. The net outflow was a huge $18.5 billion. Also, during the same period, major stock indices such as BSE Sensex have risen more than 10%. Equity prices shrugging off such a huge FPI outflow represents a watershed. It symbolises the rise of domestic investors, powered by households allocating a growing proportion of savings in financial assets. This has long-term implications for resource allocation.

Households are India’s main source of savings. Traditionally, they have allocated a greater share towards physical assets and a smaller percentage to financial avenues such as bank deposits. Two trends are evident over the last decade. Relative allocations to physical assets declined and were re-routed to financial savings. The year 2020-21 was a milestone, net financial savings exceeded that of physical assets. Of the Rs 43.9 lakh crore household savings, 52.4% represented net financial savings. The lockdown of FY21 may have influenced the sharp decline in the relative importance of physical assets, but the trend was evident earlier.

Household savings flow into equities through multiple channels: EPF, NPS, mutual funds, insurance policies and direct investments. All proxy indicators of equity-related savings point in the same direction. Systematic Investment Plans (SIPs) of mutual funds suck in larger amounts. In 2021-22, Rs 1.12 lakh crore was raised, as compared to Rs 43,921 crore five years ago. NSDL data showed 25.3 million active demat accounts of residents at the end of February, up 68% over a five-year period. Research outfit Jefferies estimated that 4.8% of the household balance sheet is in equities. So, even as bank deposits remain the most popular avenue, relative shares among financial instruments are seeing a long-term change.

Going forward, the relative increase in financial savings and the linked drop in allocation to physical assets will be dominant influences. In this context, disintermediation of banks has its benefits. For instance, the large number of start-up IPOs offered young entrepreneurs opportunities that may not have come so quickly in an earlier era. However, as household savings shift from bank deposits to equities, regulators need to ask if the retail investor is fully aware of a different risk-return equation. This transition needs to be accompanied by a focussed financial literacy project spearheaded by regulators.