Will rise of retail investors turn into Achilles heel for Indian equities?

Over a decade of benign interest rates and moderate inflation made equity markets the most preferred asset class and growth investing the widely followed investment strategy. But times are changing. The inflationary tiger is on the prowl and so are interest rates, both giving sleepless nights to global investors. The scariest cat has got the bulls running for cover while bears come out of hibernation.

Rise of the retail investors in recent times was dubbed as the biggest strength of the Indian market by policymakers and market veterans. But the same strength can turn into an Achilles heel for Indian equities.

Today’s average investor has mostly witnessed bull runs of the stock market ruled by benign interest rates. Out of the 9 crore demat accounts in India, only 2.1 crore demat accounts existed in FY13, and 55% were opened after FY20. When the bears emerge from hibernation due to anti-inflationary measures, the nouveau investors pose the risk of fleeing in droves.

Between FY13 and FY20, incremental growth of retail investors was in low single digits, the highest being in FY20 when 50 lakh new demat accounts were opened. But from FY21, equity investing picked up and 1.4 crore new demat accounts were opened in that year. In FY22, a record 3.5 crore new demat accounts were opened.

Technically, Indian stock market is still a few percentage points away from being termed as ‘bear market’. The current fall makes an average investor wonder where to hide his hard earned money in these tough times. From its peak of 18,604 in October 2021, the market has shed 2,795 points mainly on the back of persistent selling by foreign institutional investors (FIIs) who withdrew a record $20.8 billion in the current calendar year.

Retail has provided a depth to Indian markets and rise of retail investors in the last two years gave a soft landing to equities as FIIs selling was neatly absorbed by the retail crowd. As per a BNP Paribas India report dated May 03, between December 2020 and March 2022, FIIs withdrew ₹1 lakh crore while retail investors poured ₹1.9 lakh crore into Indian equities.

The report stated that individual retail investors’ holding in the NSE listed universe inched up to a 58-quarter high of 9.7% as of December 2021. On the contrary FIIs investment is in declining mode. FII holding in NSE 500 stocks expanded from approx 13% to 21% between 2004 and 2015. But in the March quarter, it declined to 19.5% of NSE 500 market capitalisation.

Between 2017-19, retail investors were net sellers but with the rise of demat accounts, the retail category turned into net buyers of the market in 2020 that strengthened in 2021 as the market rebound bolstered sentiments. But with the steep decline in the market in the past one month, questions are being asked about retail patience and persistence.

Speaking with Fortune India, Dhiraj Relli, MD and CEO, HDFC Securities, says the incremental growth of retail investors will slow down in next few years. “I think people who are interested in equities have already opened accounts and we can see a slowdown in demat openings,” he opines.