Foreign investors have issued $33 billion worth of Indian stocks since October last year, or 1 percent of India’s market capitalization, according to Goldman Sachs.
The sell-off ended India’s outperformance versus Asian markets during the coronavirus pandemic, as investors fleeing China looked for other options in the region.
Fund managers have pulled out of riskier assets, including Indian stocks, as rising interest rates, slowing growth and geopolitical uncertainty push people towards safety.
The monthly outflow of foreign investment of $6.3 billion in June was the largest for Indian stocks since the pandemic erupted more than two years ago and the ninth straight month of net outbound selling, according to Goldman Sachs.
“Record foreign investor selling in India is partly due to the rotation of funds from India to China/Asean,” said Sunil Koul, Asia-Pacific equity strategist at Goldman Sachs, “and partly to broader de-risking in Asia amid tightening Financial conditions, dollar strength and slowing growth are concerns around the world.”
India’s economy is still recovering from the effects of the pandemic and the sell-off is not being interpreted as a sign of foreign investors’ disapproval of Prime Minister Narendra Modi’s government’s policies.
But the global surge in commodity prices, triggered by Russia’s invasion of Ukraine, has pushed up costs and weighed on growth forecasts. The Reserve Bank of India has lowered its growth forecast for next year from 7.8 to 7.2 percent.
“After so many years of working life in India, I have seldom seen periods like this where foreign investors have sold consistently,” said R Venkataraman, managing director of brokerage IIFL.
Mumbai’s benchmark indices Nifty 50 and S&P Sensex are down more than 9 percent year to date, while Hong Kong’s Hang Seng is down almost 7 percent.
India’s historic rally between Spring 2020 and Fall 2021 has left prices still elevated. Some fund managers “believe India is trading at an historic premium relative to the rest of the emerging world,” Venkataraman said. “On a relative basis, it looks even more expensive.”
However, according to Goldman, Indian investors have been eagerly buying up stocks that have been jettisoned by foreign players, buying $30 billion from January to June.
India is witnessing a private investment revolution. Millions of people across the nation of 1.4 billion use smartphones powered by cheap data to buy stocks or trade derivatives through low-fee online brokers. Millions more invest money in Indian mutual funds.
Without domestic investors, Indian stocks would have been in far greater trouble.
“At the index level, it should have been at least 10 percent lower by now,” said Ajay Saraf, head of investment banking and institutional equities at ICICI Securities. “But the fact of the matter is that domestic buyers have been pretty resilient so far.”
However, Goldman’s Koul warned that this trend may not last.
“We see the risk of retail inflows slowing as bond yields rise,” he said, making less risky debt more attractive than equities.