Resilient markets, positive FPI flows lift market volume in August

If domestic indicators are remedying, don't sweat the external factors, say analysts

Equity trading volumes jumped more than 20 per cent month-on-month (MoM) in August. Market players attributed this rise to the resilience shown by domestic markets and a sharp revival in foreign portfolio investor (FPI) flows.

The average daily turnover (ADTV) for the cash segment was Rs 64,163 crore, up 28 per cent MoM and in line with the 12-month average of Rs 66,364 crore.

Meanwhile, ADTV for the futures and options segment rose 22 per cent to register a new high of Rs 137 trillion (on a notional basis).

In June, ADTV had dropped to Rs 47,456 crore, following sharp market sell-off and record FPI outflows. Volumes had only marginally improved in July, even though the markets rebound sharply.

“Gains in the market are the only reason for improved cash volumes. If the gains sustain, cash volumes will sustain, else they will go back to their June levels. If inflationary pressures subside and manage to reflect in corporate earnings, there is no cause for concern. We have seen robust flows in August,” says Prakarsh Gagdani, chief executive officer, 5Paisa Capital.

In June, the benchmark Sensex and Nifty had dropped to their lowest levels in 13 months. However, stocks have since seen sharp recovery. The benchmark indices have rallied more than 15 per cent from their June lows. In August, the Sensex gained 3.4 per cent. Moreover, FPIs bought shares worth nearly Rs 66,000 crore - the most since November 2020. 

The relative outperformance of the mid- and small-cap indices has further helped in improving cash volumes. Retail investors driving cash volumes tend to prefer mid- and small-caps over large-caps. The BSE MidCap rose 5.6 per cent in August; the BSE SmallCap rose 5.9 per cent.

Cash volumes are likely to improve further in the foreseeable future as oil prices continue to moderate and other commodity prices remain on a correction course. Geopolitical tensions in Taiwan seem to be the only overriding concern of market experts. Even rate hikes by central banks and the quantitative tightening by the US Federal Reserve are unlikely to make much of a dent in market prospects.

“We are midway through the hikes. One or two big hikes will not have much of an impact. The quantitative tightening may end up weakening the global economy and further bring down the prices of oil. Even if our gross domestic product gets a 50- or 100-basis point hit, the gain will be huge in terms of liquidity. In relative terms, India will still be the fastest-growing economy,” says Chokkalingam G, founder and chief investment officer, Equinomics Research & Advisory.

If domestic indicators are remedying, don’t sweat the external factors, says Gagdani. “In the past two/three months, we saw redemptions happening for mutual funds (MFs). If MF investments pick up, it will bolster cash volumes."