Foreign Investor Skepticism Towards Indian Equities Reaches Two-Year Peak Amid US Tariffs
Foreign investment managers are expressing increasing skepticism towards Indian equities, marking the highest level of concern in two years. This shift in sentiment is largely attributed to a weakening rupee, rising share valuations, and declining corporate profits, which collectively diminish the attractiveness of Indian markets. As a result, foreign withdrawals have accelerated, with bearish positions in derivatives reaching their peak since March 2023, exacerbated by the imposition of 50% tariffs on Indian exports to the United States.
Foreign Withdrawals and Market Sentiment
In August, foreign investors pulled out nearly ₹15,990 crore from Indian markets, following a significant withdrawal of ₹17,740 crore in July. This trend reflects a growing lack of confidence among international investors, who are increasingly concerned about the high valuations of Indian stocks compared to historical averages and their emerging market counterparts. The long-short ratio of foreign positions in derivatives has also seen a notable decline, dropping to 8.28% from 15% in the third week of July and 36.7% at the beginning of the month. This ratio indicates the balance between positive and negative positions in index futures, with a lower ratio suggesting a rise in short positions among foreign portfolio investors (FPIs).
Sudeep Shah, vice-president and head of technical and derivative research at SBI Securities, noted that persistent foreign selling and a buildup of short positions indicate a clear risk-off approach due to both global uncertainties and domestic challenges. He emphasized that the current bearish sentiment could present opportunities for contrarian investors, as an extremely low long-short ratio might signal that the market is oversold in the short term.
Impact of Tariffs and Economic Concerns
The recent imposition of a 50% tariff on Indian exports to the U.S. has further complicated the investment landscape. This tariff is among the highest globally and has prompted many international investors to reconsider their positions in Indian equities. Sham Chandak, head of institutional equities at Elios Financial Services, pointed out that the current environment offers better risk-reward propositions in other equity markets, leading to a shift in focus away from India. He noted that concerns about private capital expenditure and consumption growth in India are likely to be slower than previously anticipated due to these tariffs.
The Nifty and Sensex indices have experienced a downward trend for six consecutive weeks, marking the longest such period in five years. Concurrently, the rupee has depreciated against the dollar for five weeks, reaching a value of 87.65. This combination of factors has contributed to a challenging environment for foreign investors, who are seeking more stable and predictable markets.
Market Reactions and Future Outlook
Despite the prevailing negative sentiment, some analysts suggest that the current market conditions could lead to a rebound if positive triggers emerge. Shah indicated that easing global tensions or favorable domestic cues could prompt short covering, potentially resulting in a sharp market recovery. However, the overall outlook remains cautious as foreign investors continue to adopt a bearish stance, with nearly ten short positions for every long position in index futures, according to Ajit Mishra, senior vice president of research at Religare Broking.
The ongoing volatility in the Indian market highlights the need for investors to remain vigilant and adaptable. As international investors weigh their options, the Indian equity market must navigate these challenges while seeking to restore confidence among foreign participants. The coming weeks will be crucial in determining whether the market can stabilize and attract renewed interest from foreign investors.
Observer Voice is the one stop site for National, International news, Sports, Editor’s Choice, Art/culture contents, Quotes and much more. We also cover historical contents. Historical contents includes World History, Indian History, and what happened today. The website also covers Entertainment across the India and World.
