While the sell-off initially began due to stretched valuations and concerns over slowing economic growth, it has intensified in recent weeks amid rising US bond yields and a stronger US dollar. These factors have made Indian markets less attractive to overseas investors.
According to Amish Shah, Head of India Research at BofA Securities, global investors typically seek around 15% returns from emerging markets like India. However, with risk-free dollar returns at 4.5% and a widely expected 5% depreciation in the rupee, investors are already assured of a 9% risk-free return, making Indian equities less compelling.
Moreover, investors would expect an additional 500 to 600 basis points (bps) in returns from the equity market to compensate for the associated risk. “We believe developed markets will outperform emerging markets, including India, this year. FPIs will continue to favour US equities and bonds,” Shah noted. He added that achieving the ideal 15% return from Indian markets in 2025 seems highly unlikely.
After an outflow of nearly $11 billion in October 2024, the Indian market saw further withdrawals of $2.7 billion in November and $8.4 billion in January this year. However, foreign investors turned net buyers in December, making purchases worth $1.3 billion.
Despite the steep decline, the benchmark Nifty50 continues to trade at a premium valuation compared to its emerging market peers. According to Bloomberg data, the Nifty50 is currently valued at 18.5 times its one-year forward earnings. In contrast, South Korea’s Kospi trades at 9.2 times, Taiwan’s TAIEX at 15.9 times, and China’s Shanghai Composite Index at 12.3 times.
On Thursday (February 27), FPIs offloaded another $372 million worth of Indian shares, bringing the total outflows for this year to nearly $13 billion, according to Bloomberg data.
(Edited by : Ajay Vaishnav)
