Will Modi’s election setback end investors’ love of India?

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Since the beginning of this year, local institutional investors have bought US$25 billion worth of Indian shares, extending a long period of almost uninterrupted inflows. However, it is retail investors who are powering the rally. While foreign funds’ net positioning in derivatives markets reached its most bearish level on record before the election, individual investors turned the most bullish ever, according to data from Bloomberg.

Just as importantly, mutual funds are gaining market share from other categories of investors and are a stabilising force in India’s stock market during periods of intense selling pressure. Although excessive speculation by retail investors in smaller stocks can incur the wrath of regulators, domestic investors are underpinning India’s bull market.

Foreign investors were right to be more cautious ahead of the election, but it is domestic investors who will determine whether India’s bull run persists. With broad policy continuity virtually assured, strong fundamentals still intact and more political pressure on the government to create more jobs, their optimism looks justified.

Nicholas Spiro is a partner at Lauressa Advisory