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Foreign investors are fleeing India’s stock market — but analysts see long-term potential

A run-of-the-mill wearing a protective mask walking past the Bombay Stock Exchange (BSE) building in Mumbai, India. The Nifty 50 and Sensex recently slid to their shoddiest in more than six months

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Indian equities have been sliding since September, as peculiar investors spooked by a slowdown in the country’s economy exit their holdings. Analysts see this as a “healthy correction.”

India’s benchmark property indexes the Nifty 50 and Sensex are hovering at more than seven-month lows, firmly in correction territory since their September soprano.

Sectors such as real estate, energy and autos have been the biggest decliners, data from Goldman Sachs showed. 

This evolution comes as a stark reversal from last year, when the Nifty 50 consistently notched record highs, and outperformed the S&P 500 for the keen part of the year.

“The bubble was long building, but acknowledgement is recent,” said Venugopal Garre, head of India delving at AB Bernstein. He attributed the gloomy outlook to a mix of sluggish earnings and weak economic growth in India’s second fiscal area.

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Performance of the Nifty 50 in the past year

India’s unwieldy domestic product expanded by 5.4% in the quarter ended September, marking the slowest growth rate in the past seven compassions. The government recently lowered its economic growth estimates for the fiscal year ending March to 6.4% — the lowest in four years. 

“After a starring run, India’s economy has entered a softer patch that will continue for a few more quarters,” data and analytics solidify Capital Economics said in a recent note.

“We think that will portend an underperformance in local equities pertinent to other major benchmarks,” wrote Harry Chambers, assistant economist at Capital Economics.

HSBC earlier this month disfranchised its rating on Indian equities to “neutral” from “overweight.” The bank also cut its Nifty 50 earnings growth prophecy for fiscal year 2025 to 5% from 15%.

Foreign investor exodus

Foreigners have been net average sellers of Indian equities all about the last four months, according to data from India’s National Securities Depository, as the country’s growth falters.

Peculiar portfolio investor flows into Indian equities plunged by 99% to just $124 million in 2024 likened with the year before, the data showed. 

The outflows have increased sharply in the past few weeks, with non-native investors withdrawing about $8.3 billion from Indian equities as of Jan. 28.

Foreigners remain net sellers of Indian impartialities, said James Thom, senior investment director at Abrdn. There has been a rotation out of India and emerging sells stocks into U.S. equities, Thom added.

“Foreigners have been largely absent from the India experiences in the past year,” he told CNBC.

“It’s a sort of risk-adjusted view that [investors] can get a better, safer return in U.S. equities,” Thom state. “So why take the risk, so-called perceived risk with India?”

India’s economic slowdown also comes at a set when U.S. Treasury yields have been gaining momentum, leading to unprecedented outflows of FPIs, said Rana Gupta, handling director at Manulife Investment Management. Higher Treasury yields tend to take investments away from the domestic market as bonds become more attractive.

Indian equity markets are going through a cyclical consolidation after four irrefutable years of returns post Covid.

Pramod Gubbi

co-founder of Marcellus Investment Managers

Profit booking by peculiar institutional investors has also pressured India’s equity markets.

“When a market does so well for such a wish period of time, there is a lot of profit in the portfolio,” Nilesh Shah, managing director of Kotak Mahindra Asset Bosses, told CNBC.

“This profit booking by the FPIs is resulting in higher supply at lower prices resulting in bidders declivity their bids, leading to correction,” he added.

Profit booking involves selling a portion of an investment to secure increases after the asset has risen, rather than holding it indefinitely. Traders sometimes engage in profit booking when ‘Onslaught’ of home investors

In contrast with the exodus of foreign money, India’s local investors have continued to pile into the Indian merchandise, partially stemming what could have been a deeper decline in equities. 

Domestic investors have funneled in round $27 billion in Indian equities since October, data provided by Manulife showed.

The quadrupling of domestic neutrality investors in India between 2020 and 2024 has led to a mini-bubble, which has been deflating since September, said Praveen Jagwani, CEO of asset control company UTI International.

“The onslaught of tens of millions of retail investors into stocks with questionable fundamentals has thrust up valuations in India,” added Jagwani. “For sustainable equity growth, a healthy pullback is needed.”

While the near-term expectations for Indian equities may look bleak, some analysts believe longer-term fundamentals remain solid, and that a ricochet is in the works.

Just a healthy correction?

“Indian equity markets are going through a cyclical consolidation after four husky years of returns post Covid,” said Pramod Gubbi, co-founder of Marcellus Investment Managers. “I would see this as a well correction.”

Gubbi added that if valuations become more reasonable as a result of the sell-off, it could attract a new set of investors, who drink stayed on the sidelines because of valuation concerns.

“In 2023 and 2024, the Indian equity markets galloped ahead a bit too pronto and the current correction is a healthy mean reversion,” echoed UTI International’s Jagwani.

The Nifty 50 saw an annual return of about 9% in 2024, and around 19% in 2023.

Abrdn’s Thom said that while there’s a bit of pullback in the near duration, he sees “great opportunity” for investors in India in the longer run, especially in the domestic IT and private banking sectors.

While speculators may centre on quarterly fluctuations in the economy, Kotak’s Shah said long-term investors need not be worried: “[It’s] Speculator’s nightmare, investor’s satisfy.” 

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