Domestic Investors Come to the Rescue After Fed Rate Hike, but Correction Still Seen

Domestic institutional investors (DIIs) stepped up buying in Indian equities after the U.S. Federal Reserve raised interest rates for the first time in more than three years. The rate hike triggered concerns that higher yields in the U.S. could attract funds away from emerging markets, putting pressure on Indian equities.

Domestic investors, however, helped counter foreign outflows. DIIs bought shares worth Rs 12,504 crore in September, while foreign investors sold equities worth Rs 10,825 crore during the same month. Despite this support, the Nifty 50 plunged 6.4 per cent, marking its sharpest decline during a Fed rate hike cycle in recent times. The inflows from domestic investors provided some support but were not enough to prevent the market correction.

The latest U.S. Federal Reserve rate hike has once again highlighted the growing role of domestic institutional investors in the Indian equity market. While DII buying helped cushion the impact of foreign selling, it could not completely offset the pressure. A similar trend was visible during previous Fed rate hike cycles, when domestic investors continued buying as foreign investors reduced their exposure to Indian equities.

The Fed rate hike has again raised concerns for emerging markets as higher U.S. interest rates make dollar-denominated assets more attractive to global investors. Following the rate hike, the U.S. dollar strengthened and bond yields moved higher, increasing pressure on emerging-market currencies.

The Indian rupee also depreciated following the Fed's decision but recovered from its sharp decline amid possible intervention by the Reserve Bank of India (RBI) and fresh inflows. Foreign investors remained cautious amid rising crude oil prices, higher bond yields and broader global uncertainties. On September 17, foreign investors sold shares worth Rs 3,209 crore, while domestic institutions bought equities worth Rs 3,618 crore.

Historical data also shows that domestic investors have often stepped in during periods of foreign selling triggered by Fed rate hikes. During the previous rate hike cycle, which began in December 2015 and ended in September 2016, there were 21 months in which the Fed raised rates. DIIs bought equities in each of these months when foreign funds were selling. However, the Nifty 50 still declined in seven of those months despite DII inflows.

The current rate hike cycle is also showing a similar pattern, with domestic investors buying as foreign investors sell. However, market trends during such periods have remained mixed. Domestic investors have bought across market capitalisations, sectors and themes during the recent foreign selling, but the pace of buying suggests that they have not aggressively increased their positions.

During previous Fed rate hike periods, domestic investors were also selective in their buying. In the last rate hike cycle, DIIs showed greater interest in Mid-Cap stocks, which were viewed as value opportunities, while remaining cautious on Small-Cap stocks. Domestic investors also monitored sectors with significant foreign investor exposure, as heavy foreign selling in these sectors during Fed rate hikes could result in sharper declines.

The immediate market outlook will depend on how investors assess the impact of higher global interest rates, rising bond yields and economic growth prospects. Foreign fund flows will continue to play an important role in determining the direction of the Indian equity market, while sustained domestic inflows could provide a counterbalance to global selling pressure.

The latest Fed rate hike has once again highlighted the changing dynamics of the Indian equity market, with domestic institutional investors emerging as an important source of support. While domestic investors can act as stabilisers during periods of foreign outflows, global investors will continue to have a significant influence on market direction. Local economic and corporate factors, along with foreign fund flows, are likely to remain key drivers for Indian equities.

Disclaimer: The article is for informational purposes only and not investment advice.