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Aarati Krishnan
S. Hamsini Amritha

BL Research Bureau FII selling has been the main trigger for the recent stock market rout. But did you know that retail investor apathy too may have contributed to the fall?

Individual investors, who outdid FIIs in buying up stocks late last year, have sharply reduced their transaction volumes on the bourses over the past 10 months. This has left the market bereft of buying interest that is sizeable enough to absorb big-ticket sales.

In December 2007, when markets peaked, domestic clients (individual investors who trade through their brokers) contributed 45 per cent of the gross ‘buy’ turnover on the exchanges, while FIIs chipped in with a lower 29.3 per cent. But by October 2008, not only had individual investors halved their transaction volumes, their share in purchases had also dropped sharply to 33 per cent.

In fact, FIIs accounted for a higher share of the gross ‘buy’ transactions on the bourses in October 2008 than individual investors. These numbers are based on an analysis of institutional turnover data put out by the BSE for the “buy” and “sell” transactions on both the exchanges, on a daily basis.

The data also reveal that domestic institutions (read mutual funds and insurance companies) have ramped up their share on the ‘buy’ side of the stock markets over the past 10 months. They accounted for nearly 19 per cent of the gross purchase turnover in October, up from just 12 per cent in December 2007.

But the cutback in retail buying shows their dwindling interest in the stock markets as a whole, rather than a bearish view on the market. This is reflected in the fact that domestic investors have cut back on their stock market sales as much as they have on the purchases. FIIs, obviously, are the biggest sellers of stocks today, accounting for 45 per cent of the gross ‘sell’ turnover in October.

On a net basis (gross purchases minus sales), it is clear that only domestic institutions have been consistently buying stocks over the past 10 months. FIIs have been net sellers in every one of the 10 months, while individual investors have alternated between bouts of net buying and selling.

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