Delivery-based trades in the cash market generally peak at market highs. But do you now that the NSE has been reporting record delivery volumes?

In August, the proportion of deliverable volume to overall trades in the exchange was 29 per cent. Even in December-2007 when the previous bull market was near its peak, deliverable volumes were only 24.8 per cent of the overall volumes.

Bombay Stock Exchange has typically recorded higher deliverable volumes, probably due to lesser number of traders. Here too deliverable volumes have increased. From an average 37-38 per cent between April 2010 and March 2011, delivery-based trades rose close to 40 per cent of overall volumes in August.

Rising for some time

A close look at numbers from the exchanges show that delivery volumes have been increasing since April. But in this period, the market has been on a down slope — Sensex dropped from 19,400 in April to a low of 15,800 by end-August. This is probably the first time when delivery volumes rose in a falling market.

So, is this a trend for investors to cheer? ‘No', say market-men. It is delivery-based selling rather than delivery-based buying that is driving deliverable volumes they say. Higher delivery-selling is a signal of weakening investor confidence.

What is the reason?

“In the last five months, the Indian benchmark equity index — Sensex — has dropped 12 per cent. In this period, lots of investors sold in the equity market to move to other asset classes.” says Mr Sandip Sabharwal, CEO, Portfolio Management Services, Prabhudas Lilladher.

This could be true as there were many FMP offers and attractive NCD issues (with 12 per cent interest a year) during the period offering solace to wretched equity investors by promising a positive real return.

Discouragingly Volatile

Indian bourses have also been moving wildly between positive and negative terrains discouraging investor participation in this period. “Multiple scam breakouts and RBI's constant upward revision in interest rates kept Indian bourses very volatile. Extreme volatility with negative returns has unnerved investors,” added Mr Sabharwal.

But, are there disturbing signals on the fundamentals of India Inc? “Yes,” says, Mr D.K. Aggarwal, CMD, SMC Investments.

“IIP numbers, automobile sales figures and cement dispatches are all pointing towards slowdown in growth in Indian economy. This has lead to scepticism amongst investors towards the future earnings prospects of India Inc.”

The above apart, lower speculative volumes are also given as a reason for deliverable volumes moving to a higher percentage of the overall volumes. Day trading volumes were also down in the F&O segment.

Who is cashing out?

FIIs, DIIs role

Turnover data from the BSE shows that the foreign institutional investors and retail investors have been net sellers since April. In the period between April and August, retail investors have net sold to the extent of Rs 2,660 crore; the net outflow of funds from FIIs was Rs 8,500 crore. The domestic institutional investors on the other hand have been buyers largely.

Asked on the mood at the institutional desk, Mr Sabharwal replied: “The institutions, be it domestic or foreign, sell under two circumstances, either due to redemptions or to increase cash or if allowed by the mandate, to go into other asset classes/ markets.

“As far as the domestic market is concerned, the mutual funds on an overall basis have seen inflows and the same is the case with insurance companies.

“However, there has been pull out by foreign investors who have faced redemptions, and a large number of foreign funds have also reduced India's weightage due to inflation and policy making concerns. As such India has one of the lowest weights in the average emerging market basket today.”

Is there buying at all?

While the overall sentiment in the market has been negative, there have also been investors who were buying in the falling market with a high conviction. The buying, however, happened mostly in large-cap stocks, say broking houses.

On the outlook for coming months, Mr Sabharwal said: “The phases of disenchantment like the one we are seeing now are a part of the corrective phase of the markets and is necessary for a new bull market to unfold. Bull markets start during times of extreme pessimism and we are approaching that stage now.”

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