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Foreign investors are pulling money out of India’s equity market, cutting their exposure as the US interest rate cycle turns and millions of domestic savers continue to pile into richly valued stocks.
Foreign institutional investors have turned net sellers of India-listed shares in August, with net outflows of more than $1bn, according to data from Bloomberg and the Securities and Exchange Board of India. Year-to-date inflows stood at $2.6bn, well below the $22bn recorded last year.
The shift comes after years of strong domestic stock market performance, particularly the blue-chip Nifty 50 index. Overseas investors sought returns outside China, where the economy has struggled for momentum since the pandemic. India’s weighting in international indices rose to reflect the inflow of money while new domestic investors also helped to drive up valuations.
The country’s large internal market and rapid economic growth also insulated it from steep US interest rate rises in 2022 and 2023, which helped to pull money from many emerging markets.
“This is a story of India being in outperformance during this [Federal Reserve] hiking cycle, with geopolitical tailwinds. As the cycle turns there’s not a lot of scope to benefit [further],” said Trinh Nguyen, senior economist for emerging Asia at Natixis.
“You can think of the more compelling stories elsewhere that would benefit from the Fed cut cycle,” Nguyen said, citing investor interest in countries including Malaysia, Indonesia and South Korea.
The MSCI India index has advanced 52 per cent in the past five years, dwarfing the 11 per cent climb of the MSCI Emerging Market index in the same period.
But global investors are warning over its lofty valuations as retail investors have piled into the market.
“This cycle is locals rather than foreigners — the previous cycles were always the other way around,” said Aashish Agarwal, India country head at investment bank Jefferies.
Sat Duhra, a portfolio manager at asset manager Janus Henderson, said domestic investors had been shifting bank deposits into the market, particularly through mutual funds.
Since 2022, a net $70bn of domestic retail money has flowed into Indian equities, said Australian bank Macquarie in a recent note.
Local institutional investors are also struggling to find value in the market, according to Ashish Gupta, chief investment officer at Axis Mutual Fund. “Clearly in the traditional sense there are no pockets of value as such, multiples are elevated,” said Gupta.
Some foreign funds have taken profits and are waiting for a correction in Indian equity prices before re-entering the market, according to analysts.
“Foreign positioning in India remains light with foreign ownership at an 11-year low and conservative positioning among mutual funds,” said Sunil Koul, Asia-Pacific strategist at Goldman Sachs.
Koul expected that foreign allocations would increase over time given the “market’s macro resilience and strong earnings delivery”.
While foreign investors are showing some trepidation, retail investors remain enthusiastic.
“Valuations have been a bit crazy . . . but I do not see them coming down for a sustained period,” said a senior executive at a foreign bank in Mumbai.
For a lot of Indians “they have no understanding of the risks”, said the executive. “There’s a whole generation of people who have not seen a market correction, which is why we see a lot of people putting their savings in equities.”