India, once a prime destination for foreign investments in 2023, is now experiencing a significant reversal. According to Elara Capital, foreign funds have been pulling out of India-dedicated investments at an accelerating pace, marking the fastest withdrawal since the Russia-Ukraine crisis in 2022.
In the last five weeks alone, $575 million has exited India-focused funds, with large-cap funds seeing the largest outflows of $360 million, and mid-cap funds experiencing $215 million in redemptions. This shift signals a change in investor sentiment toward India.
The rapid withdrawal of foreign funds from India can be attributed to a range of factors, including global economic uncertainties, shifts in investor risk appetites, and more attractive opportunities in other emerging markets. Elevated valuations in Indian equities may also be prompting foreign investors to seek better risk-adjusted returns elsewhere.
October 2024 marked a record high for Foreign Institutional Investors (FIIs) in terms of net selling, with Rs 114,445.89 crore sold—an unprecedented figure. This surpassed the previous record set in May 2024, when FIIs sold Rs 42,214 crore. In comparison, during the March 2020 Covid crash, FIIs sold Rs 65,816.70 crore, but the market fell more sharply then, with Nifty dropping over 20%.
Despite October's significant selling, the market drop was relatively small, thanks to the strong buying support from Domestic Institutional Investors (DIIs), who bought Rs 107,254.68 crore in October.
The shift towards established markets like the US and Europe post-election underscores investor confidence in these regions, driven by expectations of economic stability and growth. While the US and Europe see strong foreign inflows, India is witnessing the opposite trend, with significant outflows from India-dedicated funds.
Secondly, Foreign Institutional Investors (FII) outflows have led to increased demand for foreign currency as investors convert their rupee holdings to dollars in preparation for repatriation. This surge in demand has contributed to the depreciation of the Indian rupee.
A weaker rupee raises the cost of imports, which can further exacerbate inflationary pressures in the economy. The impact of a depreciating currency is particularly felt in sectors reliant on imports, such as oil and raw materials.
This reflects a broader global shift, where investors are favoring mature markets over emerging ones like India, potentially due to concerns over valuation and global economic uncertainty.
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