PremiumThe Indian stock market has been resting on the shoulders of retail investors for a while now. The question is, will this continue?
Retail investors get attracted to investing in stocks only when the price of stocks has been going up for a while. Cast your eyes on the chart alongside.
As the BSE Sensex, India’s most popular stock market index, has gone from strength to strength, the number of demat accounts opened during a particular month have gone up as well. Most demat accounts are opened by retail investors. A demat account is required to buy and sell stocks.
In October 2021, when the BSE Sensex hit its all-time high of 62,245 points, the number of demat accounts opened during the month peaked at 3.5 million. Between November 2021 and January 2022, the number of demat accounts opened stood at 3.4 million in each month.
The BSE Sensex has largely trended lower since the beginning of the year. This has led to a fall in the number of demat accounts being opened as well. In June, the number of demat accounts opened stood at 1.8 million, the lowest since February 2021, when the new demat accounts opened stood at 1.6 million.
From its October high, the BSE Sensex was down nearly 15% until the end of June. In comparison, the number of demat accounts being opened more or less halved from a peak of 3.5 million to 1.8 million.
This is as clear an indication as there can be of the fact that retail investors tend to get into the stock market only after it has rallied quite a bit and once the market starts to fall, their interest wanes. As James Surowiecki writes in The Wisdom of Crowds: “The temptation to trade stocks on the basis of what other people are doing is nearly irresistible." As the stock market goes higher, the number of people who want to buy stocks goes up as well. And this dynamic attracts even more people. The same dynamic works in the reverse as well.
In fact, this phenomenon can be seen even in investors who invest indirectly in stocks through mutual funds, insurance companies and pension funds. In October, domestic institutional investors (DIIs) which comprise mutual funds, insurance companies, pension funds, banks and other financial institutions, had net invested ₹4,471 crore in stocks. DIIs primarily invest retail money indirectly in stocks. From November to June, DIIs invested a total of ₹2.94 trillion in stocks. During the same period the foreign institutional investors (FIIs) sold stocks worth ₹2.42 trillion. If retail investors hadn’t bought stocks like they have over the last few months, stock prices would have fallen at a faster pace.
So, where do we go from here? The Federal Reserve of the United States, the American central bank, has made it more than clear that it will keep raising interest rates to control inflation. The retail inflation in the United States in June stood at 9.1%, the highest since November 1981 when it was at 9.6%.
This means that in the months to come the Fed will keep pushing interest rates up. This will lead to FIIs continuing to sell out of Indian stocks, at least in the near future. Given this, the selling pressure is likely to continue. Of course, what impact this sustained selling will have on the overall market depends on how long retail investors continue to be bullish.
The total amount of money invested by DIIs in stocks in the nine trading days this month up until 13 July has been around ₹6,864 crore. In the nine trading days before that it had stood at ₹16,286 crore. Between this and fewer demat accounts being opened it seems to be clear that retail investors are starting to feel the pinch.