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Foreign investors are withdrawing money from the Indian stock market and reducing their exposure as the interest rate cycle in the US turns and millions of domestic savers continue to invest in highly valued stocks.
Foreign institutional investors sold Indian-listed stocks in August, with net outflows of more than $1 billion, according to data compiled by Bloomberg and the Securities and Exchange Board of India. Year-to-date inflows totaled $2.6 billion, well below the $22 billion seen last year.
The shift comes after years of strong performance by domestic equity markets, particularly the blue-chip Nifty 50 index. Foreign investors sought returns outside China, where the economy has struggled to gain momentum since the pandemic. India’s weight in international indices rose to reflect the inflow of money, while new domestic investors also helped push up valuations.
The country’s large domestic market and rapid economic growth also protected it from sharp U.S. interest rate hikes in 2022 and 2023, which helped pull money out of many emerging markets.
“This is a story of India outperforming during this (Federal Reserve) rate-hiking cycle with geopolitical tailwinds. When the cycle turns, there is not much room to profit (further),” said Trinh Nguyen, senior emerging Asia economist at Natixis.
“You can imagine more exciting stories elsewhere that would benefit from the Fed’s rate-cutting cycle,” Nguyen said, pointing to investor interest in countries such as Malaysia, Indonesia and South Korea.
The MSCI India Index has risen by around 52 percent over the past five years, dwarfing the 11 percent rise in the MSCI Emerging Market Index over the same period.
But international investors are warning about the high valuations as retail investors flock to the market.
“This cycle affects locals rather than foreigners – in previous cycles it was always the other way around,” said Aashish Agarwal, country head for India at investment bank Jefferies.
Sat Duhra, portfolio manager at asset manager Janus Henderson, said domestic investors have brought bank deposits into the market, particularly through mutual funds.
Since 2022, a net $70 billion in domestic retail money has flowed into Indian equities, Australian bank Macquarie said in a recent statement.
Local institutional investors are also struggling to find value in the market, according to Ashish Gupta, chief investment officer at Axis Mutual Fund. “In the traditional sense, there are obviously no value pockets as such, the multiples are inflated,” said Gupta.
Some foreign funds have taken profits, analysts say, and are now waiting for a correction in Indian stock prices before re-entering the market.
“Foreign participation in India remains low. Foreign ownership is at an 11-year low and mutual funds are conservatively positioned,” said Sunil Koul, Asia-Pacific strategist at Goldman Sachs.
Koul expected foreign allocations to increase over time given the market’s “macroeconomic resilience and strong earnings position.”
While foreign investors are somewhat cautious, private investors remain enthusiastic.
“Valuations have been a bit crazy… but I don’t think they will come down for a sustained period of time,” said a senior executive at a foreign bank in Mumbai.
Many Indians “don’t understand the risks,” the manager said. “There is a whole generation of people who have not experienced a market correction, which is why many people are investing their savings in stocks.”
