A fable of elephants and horses that bulls and bears of India’s stock market don’t want told aloud

Elephants have dominated the profit pool league. The finest among them, the tuskers, fetched premiums that other animals could only dream of. Owning these meant owning the market itself. Horses were the other great bet—faster but more volatile. And horses occasionally did something extraordinary: when the price offered insulted their dignity, they bought themselves back off the market. Proud animals, these.

Both X and Y hold heavy positions in both. Then came the cheetahs—a new breed on the race tracks where horses ran. They’re bred to be faster, light on capital and manpower, and raring to outpace the rest.

The elephant’s territory of bulge banking, legacy consumption, etc, began to witness other animals finding paths to the same profit pools. Even the fancied tuskers began to sweat. Their premiums gradually eased as their growth rates began to slow. In mercantile mathematics, an ebbing premium on an oversized position is not stability. It is a slow bleed with good optics.

These trends led both X and Y to the same conclusion: over time, we need to lighten up on elephants. Perhaps on horses too. They didn’t announce this, of course, since such decisions must be kept discreet.

Here is where this fable becomes an Indian story.

Foreign merchants, our Y, have pulled out about ₹3.4 trillion from Indian equities on a net basis in 15 months; over ₹1.1 trillion in the last month itself. Domestic institutions, our X, absorbed nearly all of it, deploying nearly ₹6.7 trillion in the same window, backstopped by a systematic investment plan (SIP) engine collecting upward of ₹25,000 crore from retail investors every month. The Nifty 50’s top 10 constituents, its tuskers and horses, still command nearly 45-50% of this index’s weight.

Meanwhile, India’s new-age digital-native cheetah-class companies have surpassed $150 billion in combined market cap and remain under-represented in the indices that drive institutional allocation.

X and Y together remain the dominant force in price discovery for every elephant in the stable. And now both want to gradually and rationally reduce exposure. But who would they sell these elephants to?

Three candidates. Three complications. The retail herd—310 million SIP folios fed with monthly funds—is the most honest answer. But with ₹25,000 crore collected every month, it will years for X and Y to get the job done.

New merchants—smaller funds, alternate investment funds, family offices—could pick up some part, but they also sense the same threat. So, would they step in to absorb the supply of elephants and horses? New merchants are also eyeing alpha picks that could outrun market cap-weighted indices dominated by elephants and horses.

They could sell to each other; when Y retreats, X absorbs; and when X is full, Y returns. This already happens, but it’s rotation, not resolution. It changes the name on the stable door but does not reduce how heavily both X and Y are loaded with these.

Both face the challenge of managing a long dilution, releasing elephants in quantities small enough that price discovery stays orderly, but large enough for portfolios to be transformed over 5-7 years.

It requires X and Y to behave, paradoxically, as if they are not withdrawing because the moment their transition becomes visible, the retail herd would be alerted and may quit buying.

Retail investors may already wonder whether their disciplined flows are helping X manage that transition and whether they should also focus on cheetah-heavy funds that are light on elephants and horses.

The honest answer: X and Y must gradually sell over time. Meanwhile, the weights of these animals in indices and portfolios will slowly move down. We have already seen a glimpse of it. The weight of information technology businesses in the Nifty 50 has fallen to roughly 8.9% from 18-19% in 2021. That’s a span of just about five years.

It also requires something neither discusses openly: cheetahs must turn into elephants. New tuskers need to emerge from today’s disruptors. Capital freed from old positions must have somewhere credibly worthy to flow; if not, investor money might simply re-inflate the same tuskers at lower conviction levels and higher valuations.

The horses have been solving their own problem quietly. It’s reflected in the nearly ₹2 trillion in buybacks announced by Indian companies over the last two fiscal years, shrinking their free-float and tidying the stable without asking for anyone’s permission.

The elephants watch. They cannot do the same. And the retail herd? It keeps showing up with ₹25,000 crore every month. It’s systematic and faithful but largely unaware that it has become the designated counterparty to one of the most consequential portfolio shuffles in the history of our capital market.

Depending on how one looks at it, that’s either the most reassuring aspect of India’s stock market today or something to watch closely for signs of nervousness. The animals are fictional. The rupee figures are not.

The author is head of products, Motilal Oswal Asset management Company.