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Foreign investors pulled more than $10bn out of Indian stocks in October, the biggest monthly exodus since the start of the coronavirus pandemic, on growing concerns that the market’s huge bull run may finally be coming to an end as the economy slows.
India’s two main share indices posted their worst monthly losses since March 2020 last month while the rupee fell close to a record low against the US dollar, as international interest in what was one of the hottest global markets cools.
Investors increasingly fear that Indian shares, which have more than tripled since March 2020, could now struggle in the face of weak corporate earnings, signs of an economic slowdown and moves by the central bank to curb exuberant retail lending.
“It’s a pretty classic cyclical economic downturn in India,” said Saurabh Mukherjea, chief investment officer at Marcellus Investment Managers in Mumbai.
“The question is if it’s a few quarters or a more prolonged affair?” added Mukherjea. He has been buying defensive stocks in sectors such as information technology and pharmaceuticals, which he believes will perform in “times of uncertainty”.
Investors have also sold down their positions to brace for volatility around the US elections and to free up money to chase the recent stimulus-driven rally in Chinese shares.
Following October’s outflow, net inflows from foreign investors for this year have dropped to just $2bn, according to stock exchange data. Even as money was still coming in earlier this year, foreign ownership of India’s stock market dropped to a 12-year low amid an Indian retail investor frenzy for shares.
A warning sign came in August with data showing Indian GDP grew 6.7 per cent in the three months to June, its slowest rate in five quarters. India’s “growth glass looks half-empty”, said Nomura economists last month.
After hitting a series of record highs this year, the Nifty 50 index of blue-chip Indian stocks fell 6.2 per cent in October. The Sensex meanwhile fell 5.8 per cent, its worst month since March 2020. Even so, the MSCI India trades at 24 times forward earnings, just ahead of the roughly 23 times for the US’s S&P 500 index.
Also driving stocks lower is a wide swath of Indian industry reporting sluggish earnings, with misses so far exceeding earnings beats, according to Goldman Sachs, whose analysts have lowered their rating on the country’s equities to “neutral” from “overweight”.
“We track the extent of downgrades on earnings. What we are seeing in India is fairly intense. Even [some] consumer staples are missing numbers,” said Sunil Tirumalai, chief emerging markets strategist at UBS.
Data has indicated consumer confidence is slowing; Indian vehicle sales have dipped in recent months, while bellwethers such as Hindustan Unilever, the seller of Dove soap and Cornetto ice cream, had “muted” industry wide demand growth, chief financial officer Ritesh Tiwari told analysts.
An inflection point for the glut of Indian companies coming to market in 2024 came with the highly symbolic $3.3bn listing of Hyundai’s Indian business on local stock bourses in October. Asia’s largest float this year was poorly received by retail investors, who were put off by its elevated valuation and an industry-wide vehicle sales slowdown.
Executives at Citigroup, one of Hyundai’s Indian bookrunners, nevertheless defended the listing and played down fears of a wider downturn.
“A temporary softness of one season or two months is not necessarily determining what our view on the outlook is for 2025,” Rahul Saraf, head of India investment banking at Citi, told reporters last month.
Other “large” clients are “very keen” to explore an Indian IPO, he added. “I think they’re actually encouraged with the listing of Hyundai [rather] than being discouraged.”
The cooling in sentiment also comes as China’s battered stock market enjoyed a stimulus-driven revival. Many overseas investors had been bullish on India while keeping positions in China low. But when Chinese stocks soared on news of the stimulus, many reduced Indian holdings so as to increase their bets on China or miss out on the rally.
But this shift would have limits, said Ashish Chugh, head of global emerging market equities at Loomis Sayles. “We don’t think the stimulus is going to solve the long-term problem of painful debt restructuring,” given how much China’s economy came to rely on borrowing for investment, he said.
India’s rally over the past year has been driven primarily by domestic investors ploughing bank deposits and household savings into the country’s burgeoning public markets, but foreign investors may be growing concerned that even local risk appetite is close to saturation.
“[Local] retail money that is coming into the market is still supportive. But there are signs that you’re actually reaching some limits on that,” said UBS’s Tirumalai.
Much now depends on whether Indian authorities take action to prevent a potential multiyear economic downturn, said Marcellus’s Mukherjea. While the Reserve Bank of India has indicated it is open to easing its 6.5 per cent key policy rate, governor Shaktikanta Das has stated that a rate cut now would be too risky.
Given inflation is close to 6 per cent, the RBI “faces a tough call, but I think they need to start cutting rates sooner rather than later”, Mukherjea added. “Provided there is appropriate monetary and fiscal action, we should snap out of this by Christmas 2025.”