Will foreign investors continue to sell or return to India? Experts decode

Indian equity markets witnessed a sudden withdrawal from foreign investors this month, with Rs 38,702.41 crore being withdrawn from the cash market over the last four sessions of October 2024. Consequently, benchmark indices suffered their worst losses in over two years, with the BSE Sensex and NSE Nifty falling over 5 per cent from its record high level. . 

That said, foreign investors have invested Rs 1,50,266 crore so far in 2024, and withdrawn Rs 93,792.41 crore from the Indian markets. Thus, despite the sell-off, foreign investors have been a net buyer for the year to date with a net purchase of Rs 56,473.59 crore.

 

Why are Foreign Investors fleeing Indian markets?

Analysts attribute the selling to the outperformance of Chinese stocks, a shrinking global risk appetite due to developments in the Middle East, and jitters ahead of the upcoming US presidential elections.

Deepak Jasani, head of retail research at HDFC Securities, said these concerns weigh on the minds of foreign investors, leading them to redeem or sell stocks globally—not just in India, but across several markets. According to Jasani, this trend is also driven by redemption requests from FII investors and a desire to book profits as well as the diversion of funds to China, with some investments originally intended for India and other markets now being redirected.

Jasani expects the selling pressure to continue until foreign investors feel that markets have reached fair value, both overall and at the individual stock level. “But we have the support of local institutions, which are sitting on a large amount of cash. So, they will keep deploying the cash during this fall and negate, to some extent, the impact of the selling pressure,” said Jasani.

Similarly, VK Vijayakumar, chief investment strategist at Geojit Financial Services, expects the bullish trend in China to continue, citing the low valuations of Chinese stocks and the positive outlook for China's economy, given the monetary and fiscal stimulus being implemented by the Chinese authorities. 

And, if the momentum in Chinese stocks continues, Vijayakumar speculates that foreign investors may continue selling in India, where valuations are elevated.

Will foreign investors return to Indian markets?

Ambareesh Baliga, an independent market analyst, stated, "In case we experience a sharp fall from current levels, it could be one of the factors that makes the market attractive for foreign investors to re-enter. However, it depends on how much further the market declines, as it has already witnessed a correction of nearly 1,500 points from its peak."
 

According to Baliga, Indian markets are currently very expensive. foreign investors were compelled to invest earlier because the market was relatively strong. After previous sell-offs, we’ve seen foreign investors returning over the past few months due to the relative upward movement and the fact that India was one of the few markets showing growth. However, in the last few days, geopolitical issues have taken centre stage, causing a flight of capital from emerging markets. Considering the swaps provided, we’ve observed significant movements in Chinese markets. Compared to India, China appears cheaper, and it is possible that capital has shifted from India to China. Therefore, foreign investors might return at lower levels.

That said, analysts at the Japanese brokerage firm, Nomura, believe that this will not be a long-lasting period of underperformance. According to the analysts, the structural story of India remains quite attractive, and should valuations revert to more palatable levels, foreign (and even domestic) investors would likely look to re-enter the market. 'MSCI India currently trades at a forward P/E of 24.1x (vs the post-2015 average of 19.5x) after last week's pullback, and should some of these concerns materialize, we think valuation levels going back to 21x should become an attractive point for investors to start rebuilding positions in the market,' said Nomura in its report.

Analysts, however, suggest that the retail investors can capitalise on this opportunity to buy quality stocks at relatively better prices, provided they reach attractive levels. While those levels may not have been reached yet, they could be in the next few days or weeks, making it a good buying opportunity.