Vijay Singh
New Delhi [India], November 2: One of the distinct features of the Indian markets over the last two years has been the persistent and aggressive selling by FIIs. Except for a brief respite, with some moderation in selling and intermittent buying during July and Aug (this financial year), the larger trend has been one of sustained capital outflows. They have turned aggressive again in October, with selling exceeding $5 billion during the month.
For the calendar year so far, the cumulative outflows have been massive, at over $40+ billion. This has resulted in a significant under-allocation to India by foreign investors, and two data points illustrate the enormity of this shift.
The first is India’s weight in the MSCI Emerging Markets Index. From around 22% in 2023, India’s weight has fallen to approximately 11.29% now. Just to put this in perspective, a single company in Taiwan, TSMC, accounts for a weight of around 15%+ of the MSCI EM. That tells us something about the extent to which India’s relative weight in global portfolios has shrunk.
The second is the overall FII ownership of Indian equities, which has declined from around 18% or more a few years ago to little over 15% now. That is a 15 year low for the FII ownership.
Is this massive under-allocation to India sustainable?
In our view, this is more of a contrarian signal for India. This looks more cyclical than structural, driven by elevated crude prices, currency volatility and the relative attractiveness of other markets with a hyped AI capex cycle. Together, all of them have weighed negatively on the sentiment towards India.
But market cycles do turn. The timing, of course, is anybody’s guess. Once there is some meaningful normalisation in West Asia and in the AI trade, the factors weighing on India’s relative attractiveness could begin to recede. If domestic growth remains resilient and corporate earnings hold up, it is only a question of time before foreign investors start reconsidering their allocation to India.
This need not translate into an aggressive return of FII flows overnight. Even a gradual resumption of buying as we have witnessed in July-Aug this year, it could make a meaningful difference to market sentiment given the prolonged FII selling for an extended period.
At what point this happens is difficult to predict. But if the current pressures begin to normalise, a shift from persistent selling to at least moderate buying sometime during the year is a possibility worth keeping in mind while making allocations.
