Foreign investors are pulling out of the frothy Indian stock market

Unlock Editor’s Digest for free

FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.

Foreign investors are pulling money out of India’s stock market, reducing their exposure as the US interest rate cycle turns and millions of domestic savers continue to pile into value-rich stocks.

Foreign institutional investors became net sellers of Indian-listed stocks in August, with net outflows exceeding $1 billion, according to data from Bloomberg and the Securities and Exchange Board of India. Year-to-date receipts stood at $2.6 billion, well below last year’s $22 billion.

The shift comes after years of strong domestic stock market performance, particularly the Nifty 50 index. Foreign investors have sought profits outside China, where the economy has struggled for momentum since the pandemic. India’s weight in international indices rose to reflect the inflow of money, while new domestic investors also helped boost valuations.

The country’s large domestic market and rapid economic growth have also insulated it from steep US interest rate hikes in 2022 and 2023, which have helped draw money away from many emerging markets.

“This is a story of India outperforming during this (Federal Reserve) hiking cycle with geopolitical tailwinds. As the cycle turns, there’s not much scope to benefit (further),” said Trinh Nguyen, senior emerging Asia economist at Natixis.

“You can think of more compelling stories elsewhere that would benefit from the Fed’s tapering cycle,” Nguyen said, citing investor interest in countries such as Malaysia, Indonesia and South Korea.

The MSCI India Index has risen about 52% over the past five years, outpacing the MSCI Emerging Market Index’s 11% rise over the same period.

But global investors are warning of its high valuations as retail investors have flocked to the market.

“This cycle is more locals than foreigners – previous cycles have always been the other way around,” said Aashish Agarwal, country head for India at investment bank Jefferies.

Sat Duhra, a portfolio manager at asset manager Janus Henderson, said domestic investors have moved bank deposits into the market, particularly through mutual funds.

A net $70 billion of retail money has flowed into Indian equities since 2022, Australian bank Macquarie said 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, the multiples are high,” Gupta said.

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 external allocations to increase over time given “macro market resilience and strong earnings delivery”.

While foreign investors show some trepidation, retail investors remain enthusiastic.

“The ratings were a little crazy. . . but I don’t see them going down for a sustained period,” said an executive at a foreign bank in Mumbai.

For many Indians, “they don’t understand the risks,” the executive said. “There’s a whole generation of people who haven’t seen a market correction, which is why we’re seeing a lot of people putting their savings into stocks.”