Backed by strong retail inflows into mutual funds and insurance plans, DIIs have been able to counter foreign outflows
August was an eventful month for Indian financial markets. Yet another Reserve Bank credit review went by without a rate cut. Inflation numbers released soon after the RBI meet showed the Wholesale Price Index (WPI) consolidating in negative trajectory in June, while the Consumer Price Index (CPI) fell to a fresh low of 3.78%. On the Manic Monday of August 24, the Sensex plummeted over 1,600 points. This followed rising concerns of an imminent US Fed rate hike, the desperation with which China is trying to prop up growth and the lingering effects of the Eurozone crisis.
In times of such global volatility, every market participant dreams of decoupling—an illusory feeling that tells you India is an island of calm amid stormy seas; an oasis of plenty, a place with a moat so big that it makes the place unshakeable. This decoupling illusion has been shattered many times since India opened its financial markets to foreign investors.
This time around though, there seems to be a semblance of domestic strength in ultra-stressed times. Indian markets have been relatively immune to the global devastation wrought on currencies, equities and bonds this time around, compared with similar stresses in the past. Not least among the encouraging indicators is the impact of FII inflows. While these flows still determine broad market direction, the impact seems to be relatively muted this time around.