Are domestic investors as big as foreign investors?
Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.
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In today’s newsletter, we look at 4 big stories:
The relentless rise of Indian investors
Is India open for business?
Just give me a job
RBI governor has some things to say
The relentless rise of Indian investors
Let's dive into the incredible transformation of Indian investors in the stock markets over the past few years.
Since COVID hit, the Indian markets have undergone a dramatic shift. To put things in perspective, in just five years since the pandemic, our markets have grown as much as they did in the entire previous decade. Recently, the NSE shared some eye-opening data on investor growth and the changing ownership patterns of Indian equities, giving us a chance to reflect on how far we've come.
In July, the Indian markets hit a significant milestone: the total number of unique investors reached 10 crore for the first time. Now, if we look back, in 2013, there were just 1.5 crore unique investors in our markets. By 2020, this number had doubled to 3 crore, taking seven years to achieve that growth. But here's where it gets interesting—by 2022, we saw the number of unique investors double again to 6 crore in just two years. And now, in 2024, we’re at 10 crore, with the last 1 crore investors joining in just five months. That’s some truly remarkable growth.
But it’s not just the number of investors that’s changing; the ownership pattern of Indian equities is shifting in a big way too. For a long time, foreign institutional investors (FIIs)—including international asset managers, pension funds, sovereign wealth funds, and hedge funds—were the dominant holders of Indian equities, apart from promoters. However, as of June 2024, the FII share of ownership in NSE-listed equities dropped to 17.4%, marking a 12-year low.
On the flip side, domestic institutional investors (DIIs), which include mutual funds, insurance companies, and pension funds like EPFO, have hit a new high in ownership, reaching 16.2%. The gap between FII and DII ownership has narrowed to just 1%, and it looks like DIIs will soon overtake FIIs. Of this, mutual fund holdings of Indian equities now stand at 9%. For some context, this was just 3.6% back in 2009, driven largely by the growing popularity of SIPs, which currently bring in about Rs 8,500 to 9,000 crores a month in net inflows.
Retail ownership tells a similar story. Retail investors now hold a record 7.6% of Indian equities. And here's a stat that really stands out: from 2013 to 2017, individual investors were net sellers, with outflows of 1.8 lakh crores. But since 2020, they’ve flipped the script and have been net buyers, purchasing equities worth 3.9 lakh crores—excluding their investments in mutual funds.
When we look at the bigger picture, FIIs have invested around 87,400 crores since 2021. But compare that to DIIs, who’ve invested a whopping 8.5 lakh crores, and individual investors, who’ve put in 3.7 lakh crores. Despite the reduction in FII ownership, DIIs, mutual funds, and retail investors have more than compensated, driving a stunning change in the ownership pattern of Indian equities.
This shift signals a new era for Indian markets, where domestic investors are playing an increasingly vital role in shaping the future.
Is India open for business?
Let's talk about whether India is truly open for business.
India's at a critical juncture right now. If we want to achieve our full potential, we've got a lot to do. We need to build and manage world-class businesses, embrace cutting-edge technology, and produce products and services that can compete in the best markets globally. And, perhaps most importantly, we need a significant amount of investment to fuel this growth. When you look at today’s advanced Western countries, it took them over two centuries to get where they are. But in the last fifty years or so, there's been a shortcut.
That shortcut is foreign investment. Foreign investors bring in the necessary funds to build factories, set up logistics networks, and invest in research and development—essentially everything India needs for its development. But they also bring in invaluable knowledge, teaching Indians the best ways to do business, drawn from their global experiences. Many of Asia’s most successful economies, like South Korea, Hong Kong, Taiwan, and Singapore, owe a lot of their spectacular growth to massive foreign investments.
India’s been trying to follow this playbook, but the journey has been anything but straightforward.
Before the Global Financial Crisis, India was seeing a sharp and steady increase in foreign investment. But after 2009, this trend reversed. FDI as a share of the Indian economy has never quite recovered to those pre-crisis levels.
While foreign investment hasn’t kept up with India’s growing economy, in absolute terms, investment into India was still on the rise. Gross investment inflows hit a high of US$ 84.8 billion in FY 2022. But then things took a turn. Last year, direct investment into India dropped to US$ 26.6 billion—the lowest we’ve seen since FY 2007. This happened for two main reasons. First, the money coming into India fell significantly, to US$ 71 billion. Second, investors pulled out a massive US$ 44.4 billion from the country—almost twice as much as they ever had before.
There are several reasons for this decline. For one, the global economy has shifted. Globalization is retreating in many parts of the world, and there have been serious economic headwinds in recent years. But that doesn’t explain everything. While global FDI fell by just 2% in 2023, investment into India plummeted by 43% over the same period. In 2022, India was the 8th most attractive destination for investment worldwide. By 2023, we’d dropped to 15th place, with our share of global investment shrinking significantly over the past couple of years.
Source: The Print
Here’s the challenge India faces: we can’t force foreign investors to do anything. They don’t live here, and we aren’t entitled to their money. The only way to attract them is to make India a great place to do business. It’s not enough to just showcase how large our market is. Investors need to believe that India’s regulatory policies will allow them to operate stably and flourish, without the government creating unnecessary obstacles.
Unfortunately, the Indian government has a reputation for making things difficult for businesses. Despite the economic liberalization we saw a few decades ago, businesses still have to navigate miles of red tape to get anything done. Just in the last couple of months, tax officials have gone after numerous companies for trivial issues, like sister companies in a conglomerate using the same name. India also hasn’t been too keen on investment treaties that protect foreign investors. In 2016, we canceled 76 out of 83 bilateral investment treaties.
But there’s some good news. So far, in FY 24–25, things have been looking up compared to FY 23–24. In the June quarter of this year, gross investment inflows into India were at US$ 22.5 billion, up from US$ 17.8 billion in the same quarter last year. Net FDI as a whole jumped from US$ 4.7 billion to US$ 6.9 billion. However, it’s worth noting that in June 2024 alone, investors withdrew US$ 6.7 billion from Indian markets—the highest amount ever recorded in a single month.
So, are we finally heading toward more investment, or are we scaring investors away? It’s tough to say for sure, but one thing’s clear: we need a lot more investment than we’re currently getting.
Just give me a job
Let's dive into one of the hottest topics in national politics right now: jobs. There’s a lot of talk about how Indians don’t have enough ways to make a living, and many argue that this is holding back India’s economic potential. As politicians debate over employment numbers, we’ve got some data to consider. Every quarter, the government releases a ‘Periodic Labour Force Survey,’ giving us a snapshot of urban employment. So, let’s take a look at how things are shaping up.
Out of India’s approximately 1.4 billion people, around 900 million are of working age. The rest are either too young or too old to work. But not all of these 900 million are part of the “labour force.” Just because someone is of working age doesn’t mean they’re actually working or even looking for work. The labour force is made up of people who are either employed or actively seeking employment.
Here’s where India faces a challenge. Our ‘labour force participation rate’—which measures the proportion of working-age adults who are in the labour force—is incredibly low. However, there’s some progress; it’s been above 50% for more than two quarters now. While this is still far below the global average of 61%, it’s better than it has been in a long time. Similarly, our ‘worker population ratio’ (WPR), which indicates the proportion of working-age adults who actually have jobs, has been increasing by about 1% each year. So, more Indians seem to be working than before.
But this still leaves us with a significant issue: almost half of our working-age population isn’t in the labour force, and a large number of those who are don’t have work. Why is that?
There are several reasons why people might not be working. Some may face physical or mental challenges, while others might be studying or preparing for competitive exams. And some might have simply given up on ever finding a job. One of the biggest problems for India is the stark gender gap in the workplace. There’s always been a huge disparity between the proportion of Indian men and women who work. In the June quarter, over 70% of Indian men were working, compared to just 23% of Indian women.
While this trend is concerning, there has been a slight improvement over the past couple of years. Something seems to have shifted during the pandemic, encouraging more women to enter the workforce. June marked the eighth consecutive quarter where women’s labour force participation increased faster than that of men. Since June 2019, the worker population ratio for men has risen by 3%, while for women, it’s gone up by 6%.
Our unemployment rate has held steady at 6.7%. This might not sound like much, but it’s actually quite impressive given that our workforce is growing. See, percentages only tell part of the story—the overall size of the workforce matters too.
Last year, about 94% of India’s labour force was employed, and this year, it’s roughly the same. But here’s the key point: India’s labour force has grown. To maintain the unemployment rate at the same level, India has created hundreds of thousands of new jobs over the past year.
However, there are two important caveats to keep in mind:
First, a country’s unemployment rate measures the percentage of people in the labour force who don’t have a job. It doesn’t account for the percentage of the total population that isn’t working. So, if you’re not actively seeking work, you’re not counted as unemployed. If you’re sitting at home, discouraged and not looking for a job, you’re not part of the labour force, and therefore, you’re not considered unemployed.
Second, the PLFS has a pretty low bar for what counts as “working.” If someone worked for just one hour in the past week, the government considers them employed. So, many people who might think of themselves as unemployed could, for the purpose of this survey, be classified as working.
Even with these caveats, it seems like India’s employment picture is gradually improving. But there’s still a long way to go to ensure that everyone who wants to work can find meaningful employment.
RBI governor has some things to say
Let’s dive into what Shaktikanta Das, the Governor of the Reserve Bank of India, had to say in his recent interview with NDTV Profit. When the RBI governor speaks, it’s something we all need to pay attention to because whatever the RBI does has a direct impact on our wallets.
The governor touched on many of the key issues we’ve been discussing, like inflation and credit growth. Let’s start with inflation.
But before we get into the details, let’s quickly set the stage: inflation affects just about everything in our lives. When prices go up, it impacts everything from the cost of our morning coffee to the interest rates on our credit cards.
In July, headline inflation dropped to a five-year low of 3.5%. To give you some context, in July 2023, this number was at 7.44%. At first glance, this sounds like fantastic news, right? But let’s break down why this number looks so impressive. It’s largely due to something called the “base effect.”
Simply put, last year’s inflation was really high, so when we compare this year’s figures to that, even a small decrease seems like a big drop. But this effect is temporary, and once the base levels out, inflation will likely return to its usual trend. A big part of why inflation was so high last year was due to rising food prices—supply chain issues, heatwaves, lack of rain, pest infestations, you name it. Anything that could go wrong, did go wrong. Food and beverages make up 45% of the inflation basket, so this pushed up the headline inflation significantly. This year, however, the monsoon has exceeded expectations, and the hope is that food prices will come down, bringing overall inflation down with them.
Here’s what Das had to say on growth and inflation:
The RBI’s target is to keep inflation around 4% over the long term. Even if inflation dips below 4% temporarily, it doesn’t mean everything’s fine. This could just be a short-term dip, so the RBI isn’t going to start cutting interest rates based on one month’s inflation data.
He also pointed out that even if the core CPI (which excludes food prices) shows lower inflation, it doesn’t mean inflation is fully under control. For most people, food prices are a significant part of their daily expenses, so ignoring them doesn’t give a true picture of the cost of living.
Despite the high inflation, Das mentioned that India can still grow at around 7.2%. The governor made it clear that the RBI is taking a patient and careful approach. They’re not going to rush into cutting interest rates based on temporary changes in inflation because that could lead to bigger problems down the line.
Das also spoke about deposit and credit growth. While credit growth—basically, the loans given by banks—is strong, deposit growth is lagging behind. This gap could potentially lead to liquidity issues in the future. He emphasized that while this isn’t a problem yet, banks need to carefully monitor this trend and manage their liquidity to avoid challenges down the road.
He also touched on the changing investment habits of young Indians. More and more young people are investing in stocks, mutual funds, and insurance products rather than just keeping their money in bank deposits. This shift is partly due to greater confidence in the economy and the availability of new financial products. While this is a positive development, it also means banks need to step up their game by offering more attractive deposit products to compete with these alternative investments.
Das didn’t shy away from discussing the massive problem of illegal loan apps. Over the last 4-5 years, hundreds of these shady apps have popped up, making it easy for people to borrow money. But the catch is, when users sign up, these scammy apps get access to their contacts, photos, videos, and more. Once the loan is taken, these illegal loan companies start harassing people in the contact list, morphing pictures, and creating a societal nuisance. Das mentioned that the RBI has been working closely with banks and non-banking financial companies (NBFCs) to monitor and control the spread of illegal loan apps, ensuring that these financial institutions don’t unknowingly get involved with or support unauthorized lending practices.
Finally, he also addressed the issue of fintechs. Over the last year, the RBI has been closing several regulatory loopholes that fintech companies had been exploiting. Just this week, the RBI cracked down on peer-to-peer lending. When asked about these stringent actions, Das mentioned that while the RBI encourages innovation in the fintech space, it’s also essential that fintech companies operate within certain "guardrails." These regulatory boundaries are in place to preserve financial stability and protect consumers. For instance, some fintech models might build up risks over time, and the RBI needs to intervene early to prevent these risks from escalating.
So, when Shaktikanta Das speaks, it’s clear that the RBI is keeping a close eye on the big picture, balancing the need for growth with the importance of maintaining financial stability.
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Excellent
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