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Foreign investors have started to take money off the Indian markets and the trend is likely to continue, as other markets such as Korea and Taiwan have become more attractive, an HSBC report said.
The potential for equity outflows has increased, with foreign positions looking “stretched” in India, said the global brokerage. It added that Indian markets experienced the first monthly outflow this year in May, while Korea and Taiwan saw inflows of $1.5 billion and $1 billion, respectively. In the first five months of this year, foreign investors put $7.6 billion in Indian markets.
Korea and Taiwan witnessed inflows of $8.6 billion and $8 billion, respectively. Overall, Asian markets (excluding Japan), attracted inflows of $25.4 billion in the first five months this year, HSBC said.
“Equity outflows have started, with the market (Indian) experiencing the first monthly outflow in 2015. We expect this trend to continue as other markets become more attractive,” HSBC said. According to HSBC, the dynamics of the Indian market started to change early this year, when investors realised reforms were going to take longer than expected, resulting in earnings pressure, while valuations remained at all-time highs.
"Investors have started to take money off the table in India but it is still an overcrowded trade. We believe that valuations need to adjust downwards," HSBC added.
The Sensex is currently hovering around 26,700 points.
The gauge has lost 1,080.50 points since RBI took a cautious stance on economic recovery in its June 2 policy review and the Indian Meteorological Department (IMD) forecast monsoon to be "deficient" this year.
"With no further monetary easing expected, pressure on corporate earnings, expensive valuations, high fund exposure, and weaker currency, we stay underweight India," the report said.
HSBC had cut its rating on India from "overweight" to "underweight" on May 13. The brokerage firm, however, noted that the long-term growth potential of Indian market remains intact.
On policy rates, HSBC said any further rate cuts are unlikely in 2015.
In the policy review meet on June 2, RBI cut interest rate by 0.25 per cent for the third time this year to spur investment and growth but hinted that there may not be any more cuts in the near-term.
