Mumbai: Expectations for a second rate cut this year by India’s central bank have already helped lift the nation’s $2.2 trillion equity market to an all-time high. A peek under the hood of the monster rally, however, reveals a dichotomy.

Local mutual funds and insurance companies are selling shares even as the domestic market is a top destination for overseas money in Asia this year.

Consider this: Domestic institutional investors pulled a combined 139.3 billion rupees ($2 billion) from shares in March, the biggest withdrawal in three years, even as foreign funds plowed 426.7 billion rupees, data compiled by Bloomberg show.

The best quarter for Indian equities since June - after a dismal 2018 - was too good to pass up for money managers, especially with the nation heading into general elections next week, analysts say. “Domestic and overseas inflows have been inversely correlated in the past, and this time we have redemption pressure ahead of elections,” said Vidya Bala, Chennai-based head of mutual fund research at Wealth India Financial Services Pvt.

In March 2014, two months before Prime Minister Narendra Modi took office, large local investors pulled 131.3 billion rupees from shares. But foreigners bought double that amount, the data show. There’s end-of-fiscal year seasonality as well - funds were net sellers in March in five of the past seven years.

Robust liquidity from mutual funds and insurance companies have helped buffer the market against outflows sparked by global shocks in recent years. Money managers purchased $16 billion of shares in 2018, overwhelming the foreign outflow of $4.6 billion that was the biggest in a decade. This backstop has weakened following a decline in contributions to equity plans for four straight months through February.

“Traditionally, retail investor sentiment is tepid pre-election but picks up drastically after,” Bala said. “The reaction of domestic institutions has more do with flows they receive and not their stance on the market.”

It won’t be long before locals and their foreigners get on the same page, given signs of recovery in company earnings and a revival in risk appetite following the dovish shift in central bank policies globally and in India.

“Earnings growth is going to come this fiscal year and that should drive up the market irrespective of which government comes to power,” Jyoti Vaswani, chief investment officer of Future Generali India Life Insurance Co., said. “Mutual funds are still receiving money. It’s just a matter of time before domestic investors return in a big way.”