India’s stock market has been experiencing significant turbulence recently, with foreign investors pulling their money out amidst a cooling economy. While this exodus has put downward pressure on the country’s equity markets, analysts remain optimistic about long-term opportunities.
A Cooling Economy and Declining Markets
Indian equities have been on a downward trajectory since September 2024, with the benchmark indices, Nifty 50 and Sensex, plunging to their lowest levels in over seven months. This correction comes after a stellar performance in 2023 and early 2024, during which the Nifty 50 consistently outperformed global benchmarks like the S&P 500.
Data from Goldman Sachs highlights that sectors such as real estate, energy, and autos have been hit the hardest during this downturn. The slowdown in India’s economy is a key driver of this decline, with the country’s GDP growth slipping to 5.4% in the quarter ending September 2024—the slowest pace in seven quarters. The government has also revised its growth forecast for the fiscal year ending March 2025 to 6.4%, the lowest in four years.
This economic softness, coupled with sluggish corporate earnings, has prompted analysts like Venugopal Garre of AB Bernstein to describe the current situation as a “healthy correction” following years of strong gains.
Foreign Investor Exodus
Foreign portfolio investors (FPIs) have been net sellers of Indian equities for four consecutive months, with outflows accelerating in recent weeks. As of January 28, 2025, foreign investors had withdrawn $8.3 billion from Indian equities, according to data from India’s National Securities Depository.
This marks a stark reversal from 2023, when foreign inflows were robust. In 2024, FPIs into Indian equities plunged by 99%, with only $124 million invested compared to the previous year.
James Thom, Senior Investment Director at Abrdn, attributes this decline to a shift in global investor sentiment. “Foreigners have been largely absent from the India story in the past year,” Thom said, noting that many investors are rotating into U.S. equities, which are perceived as safer due to rising Treasury yields.
Domestic Investors Step In
Despite foreign outflows, domestic investors have continued to invest heavily in Indian equities. Since October 2024, local investors have funneled approximately $27 billion into the market. This surge in domestic investment has mitigated some of the decline caused by foreign outflows.
Praveen Jagwani, CEO of UTI International, noted that the rise in retail investors has created a “mini-bubble” in the market, which has been deflating since September. He emphasized the need for a “healthy pullback” to stabilize valuations and set the stage for sustainable growth.
A Longer-Term Perspective
While the near-term outlook for Indian equities may appear bleak, analysts see potential for a rebound. Pramod Gubbi, co-founder of Marcellus Investment Managers, described the current market correction as part of a cyclical consolidation after four years of strong post-Covid returns.
“If valuations become more reasonable as a result of the sell-off, it could attract a new set of investors who have stayed on the sidelines because of valuation concerns,” Gubbi said.
Domestic IT and private banking sectors remain areas of interest for long-term investors, according to Abrdn’s Thom. Meanwhile, Kotak Mahindra Asset Management’s Nilesh Shah added that while speculators might view the current market as a nightmare, it presents a “delight” for patient investors focused on the long term.
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