After a brief interruption in the early months of the year, courtesy of the election uncertainty, foreign investors are pumping money into Indian stocks yet again. Interestingly, net foreign purchases for this quarter are expected to reach $8.5 billion, the highest since mid-2023.
This renewed interest comes as Prime Minister Narendra Modi secured a third term, reassuring investors about policy stability. Additionally, India’s weight in some global indexes has surpassed that of China, making it an attractive option as the U.S. Federal Reserve starts to cut interest rates.
Investors seem growingly at ease with India’s equities market, though it is overvalued to other emerging markets. On course is the benchmark NSE Nifty 50 Index, which is seeking its ninth successive annual increase. According to HSBC’s James Cheo, even if the prices are a bit higher, Indian equities appear attractive compared to growth-starved markets.
With the economic woes besetting China, including a property crisis and deflation, India is emerging as a possible new engine of growth in the global economy. India is set to become the world’s third-largest economy by 2028, the International Monetary Fund predicts. “It will be the biggest contributor to global growth,” Bloomberg Intelligence suggests. Recently, India’s GDP was recorded at 6.7%, compared to 4.7% for China in the last quarter.
September is shaping up to be the fourth consecutive month of foreign investment in India. Earlier this year, foreign investors had sold about $1 billion in shares, but following Modi’s coalition victory in June, confidence has returned.
The MSCI India Index has risen 7% this quarter, while the broader emerging markets index is up around 2%. The Indian stocks have cost about 21 times earnings, well above a 10-year average of 18 times, making them twice as expensive as other emerging markets.
IPO Rush
The company’s primary market is also doing well. Many small companies are raising IPOs, but bigger deals are starting to flow in. According to Deven Choksey of KR Choksey Shares & Securities, foreign investors were drawn earlier to China because its valuations were lower.
This time around, they are coming back to India because it has better growth prospects. As stock prices rise, the cost of hedging against declines in the Nifty 50 has also increased significantly, about 45% higher than last year’s average. Market observers are cautious, especially with Modi’s party announcing cash handouts in some states ahead of regional elections. Wealth advisors are suggesting clients reduce their investments in more expensive stocks.
For now, India manages to attract global investors partly because of a stable currency. The interventions of the central bank have helped the rupee to end up being one of the least volatile currencies in Asia. Sumeet Rohra, a fund manager based in Singapore, points out that “investment market-generating returns cannot be ignored for too long, especially with the growing Indian exposure in the MSCI indexes.”.
