Foreign investors pulled more than $10 billion from Indian stocks in October, the largest monthly exodus since the coronavirus pandemic began as concerns grew that the market’s massive bull market may finally be ending as the economy slows.
India’s two main stock indices last month posted their worst monthly losses since March 2020, and the rupee was near record lows against the US dollar as international interest in the Indian market, once one of the hottest global markets, cooled.
Investors are increasingly concerned that Indian stocks, which have more than tripled since March 2020, could suffer due to weak corporate earnings, signs of an economic slowdown and central banks’ measures to curb excessive retail lending.
“It’s a very typical cyclical recession for India,” said Saurabh Mukherjea, chief investment officer at Marcellus Investment Managers in Mumbai.
“The question is whether it’s something over a few quarters or something more long-term.” Mukherjea added. He has been buying defensive stocks in sectors such as information technology and pharmaceuticals, and he believes these investments will pay off in “uncertain times.”
Investors also sold positions to raise funds to hedge against volatility surrounding the U.S. election and to track the rally in Chinese stocks following the recent stimulus package.
According to stock exchange data, net inflows from foreign investors this year have decreased to $2 billion since the fund outflow in October. Foreign stake in India’s stock market has fallen to a 12-year low amid enthusiasm among Indian retail investors for stocks, despite funds still coming in earlier this year.
A warning sign emerged in August with data showing India’s GDP grew 6.7% in the three months to June, the slowest growth in five quarters. Last month, Nomura economists said India’s “growth glass appears to be half empty.”
After hitting a series of record highs this year, the Nifty 50 index of blue chip Indian stocks fell 6.2% in October. Meanwhile, the Sensex fell 5.8%, its worst month since March 2020. Nonetheless, MSCI India trades at 24 times forward earnings, slightly ahead of the US S&P 500 index’s roughly 23 times.
Goldman Sachs analysts downgraded their rating on Indian stocks from ‘overweight’ to ‘neutral’.
“We track the extent of earnings downgrades. What we are seeing in India is quite intense. even [some] There are no numbers for consumer staples,” said Sunil Tirumalai, chief emerging markets strategist at UBS.
Data shows consumer confidence is slowing. Car sales in India have declined in recent months, with leaders such as Hindustan Unilever, which sells Dove soap and Cornetto ice cream, ‘dulling’ the rise in demand across the industry, its chief financial officer said. ), Ritesh Tiwari, told analysts.
An inflection point for the glut of Indian companies entering the market in 2024 was the highly symbolic listing of Hyundai Motor Company’s India operations in the local stock market in October with a valuation of $3.3 billion. Asia’s biggest float this year has not been well-received by retail investors due to high valuations and slowing vehicle sales across the industry.
Nonetheless, executives at Citigroup, one of Hyundai Motor’s Indian book operators, defended the listing and dismissed fears of a wider recession.
“A temporary slowdown of a season or two does not necessarily determine our view on the outlook for 2025,” Rahul Saraf, head of investment banking in India at Citi, told reporters last month.
Other “large” clients are “very keen” to explore Indian IPOs, he added. “I think I’m actually encouraged by Hyundai Motors’ listing. [rather] Rather than being discouraged.”
While the stagnant Chinese stock market enjoyed a revival thanks to stimulus measures, investor sentiment also cooled. Many foreign investors were bullish on India while keeping their positions on China low. But as Chinese stocks soared on news of the stimulus, many people either increased their investments in China or reduced their Indian holdings to miss out on the rally.
But there will be limits to these changes, said Ashish Chugh, head of global emerging markets equities at Loomis Sayles. Given how dependent China’s economy has become on borrowing for investment, he said, “I don’t think stimulus will solve the long-term problem of painful debt restructuring.”
India’s rally over the past year has been largely driven by domestic investors plowing bank deposits and household savings into fast-growing public markets, but foreign investors are increasingly concerned that local risk appetite is close to saturation.
“[Local] Retail funds in the market remain supportive. But there are signs that we are actually reaching some limits,” said Tirumalai of UBS.
Marcellus’ Mukherjea said it now depends on whether Indian authorities take steps to prevent a potential multi-year recession. While the Reserve Bank of India has said it is willing to cut its benchmark interest rate to 6.5%, Governor Shaktikanta Das has said a rate cut would be too risky now.
Given that inflation is close to 6%, the RBI “faces a difficult situation, but we think it has to start cutting interest rates soon,” Mukherjea added. “With appropriate monetary and fiscal measures, we should have this problem resolved by Christmas 2025.”
