Foreign Fund Exodus Hits Indian Stock Market
MUMBAI: In a significant shift, foreign fund managers from global financial hubs like New York and Singapore have offloaded over ₹1 lakh crore worth of Indian stocks in just two months. This trend follows a staggering ₹2 lakh crore in sales since October of the previous year, surpassing the record ₹1.7 lakh crore net inflow recorded in 2023. The Sensex has also taken a hit, plummeting more than 11,000 points from its peak near 86,000 at the end of September, largely attributed to this foreign selling.
Reasons Behind the Selling Spree
Market analysts have identified two primary factors driving this foreign fund exodus. Firstly, many foreign investors find India less appealing due to sluggish earnings growth and weak demand. The depreciation of the rupee has further diminished returns in dollar terms, making Indian investments less attractive. Secondly, some clients of these foreign funds are redeeming their investments in emerging market schemes, influenced by recent global market volatility and the unexpected resilience of Wall Street. To fulfill these redemption requests, foreign funds are compelled to liquidate their holdings in Indian stocks, which have become a prime target due to the post-pandemic rally in the domestic market.
Pratik Gupta, CEO and co-head of Kotak Institutional Equities, noted that even if India were currently attractive, foreign funds lack the capital to invest as money is being redirected back to the U.S. Emerging market fund managers anticipate inflows in the latter half of the year; however, India is not expected to be their primary focus due to its slowing growth and relatively high valuations.
Impact of U.S. Market Dynamics
The selling pressure intensified following the recent election win of Donald Trump, which has led to a rise in the dollar and U.S. bond yields. V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, explained that when U.S. 10-year bond yields exceed 4.5%, foreign funds are less inclined to take risks in emerging markets, particularly when valuations in countries like India are elevated. Additionally, the introduction of capital gains tax is starting to affect foreign fund managers. Gupta remarked that while the tax was less impactful during periods of high returns, the current environment has led to a sharp decline in return expectations.
Future Outlook for Foreign Investments
Looking ahead, the key to halting the selling trend lies in signs of improved consumption demand, a better earnings outlook, and more reasonable valuations. Inderbir Singh Jolly, CEO of PL Capital, emphasized that GDP growth above 6-7% would be crucial in supporting corporate earnings and attracting foreign investors back to the Indian market. Other essential factors include macroeconomic stability, control of inflation, and investor-friendly policies.
While foreign funds have a significant influence on Indian stocks, their overall exposure remains relatively small. Currently, foreign investors hold approximately $800 billion worth of Indian equities, accounting for about 16% of the country’s market capitalization. Market experts suggest that if the Indian market experiences further corrections, foreign funds may slow their selling as they begin to identify value in certain stocks.
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