Foreign investors are once again focusing on Indian markets, with global funds pouring money into Indian equities. After some uncertainty earlier this year, foreign inflows have surged, with $8.5 billion in net purchases this quarter. This marks the highest foreign investment in Indian stocks since mid-2023, signaling growing confidence in India’s economic prospects.
India Attracts Global Capital Amid Strong Economic Growth
One of the key reasons for the return of foreign investment is the stable political environment in India, following Prime Minister Narendra Modi securing a third term. Additionally, India’s growing weight in several global indices, especially when compared to China, has made it a favored destination for international capital. This shift is further supported by expectations of potential interest rate cuts in the US, which could lead to an even larger influx of foreign funds.
Despite India being relatively expensive compared to other emerging markets, its growth story remains compelling. According to James Cheo, Chief Investment Officer for Southeast Asia and India at HSBC Global Private Banking & Wealth, “Even though Indian stocks have higher valuations, the growth potential here is much better than in other markets.” Corporate earnings are rising, and favorable macroeconomic conditions continue to support India’s long-term growth trajectory.
India vs. China: A Clear Shift in Investor Focus
India’s strong growth stands in contrast to the economic challenges faced by China, which is grappling with a property crisis, weak government stimulus, and deflationary pressures. These factors have dented China’s economic prospects, creating an opportunity for India to emerge as a more attractive investment destination. The International Monetary Fund (IMF) predicts that by 2028, India could become the world’s third-largest economy. Furthermore, Bloomberg Intelligence highlights that India is expected to be the biggest contributor to global growth during this period.
India’s gross domestic product (GDP) growth of 6.7% in the last quarter may have slightly missed expectations, but it was well above China’s 4.7%. The continuous inflow of foreign capital over the past four months reflects the growing confidence among global investors in India’s economic stability and potential for higher returns.
Positive Stock Market Trends and High Valuations
The MSCI India Index has gained 7% this quarter in dollar terms, significantly outpacing the broader MSCI Emerging Markets Index, which posted a modest 2% increase. The Indian market is on track to register gains for the sixth consecutive quarter, further enhancing its appeal to global investors.
However, with this strong performance comes high valuations. The Nifty 50 Index is currently trading at a multiple of 21 times earnings, compared to its 10-year average of 18 times. In contrast, the MSCI Emerging Markets Index is trading at about half that valuation. Despite these higher valuations, India’s market continues to attract foreign investors who see long-term growth potential.
Primary Market Boom Adds to India’s Appeal
Foreign capital isn’t just flowing into secondary markets—India’s primary market has also become a hotspot for global investors. This quarter, India’s primary market has been the busiest in the world, with a steady stream of IPOs from small and mid-sized companies. Local businesses are looking to capitalize on India’s economic boom, and upcoming IPOs worth billions of dollars are expected to hit the market soon.
Deven Choksey, Managing Director of KR Choksey Shares and Securities in Mumbai, noted that foreign investors are increasingly drawn back to India. He explained, “The earlier shift toward China has failed, and now global money is moving back to where growth is truly happening—India.”
Sumit Rohra, Fund Manager at Smartsun Capital in Singapore, echoed this sentiment, saying, “Foreign investors realize they cannot ignore a market that consistently delivers returns. India’s growing presence in global indices, like MSCI, only makes it more attractive.”
Future Outlook: Why Foreign Investors Are Optimistic About India
The current surge in foreign inflows is not a one-off event. With India being increasingly viewed as a global growth engine, investor interest is expected to continue in the coming months. India’s expanding role in global markets, stable political environment, and strong corporate performance make it a prime candidate for long-term investments.
While high valuations may pose a challenge, the promise of sustained growth, backed by solid economic fundamentals, means that foreign investors are unlikely to turn away from India anytime soon. As the country strengthens its position on the global stage, foreign capital will continue to play a crucial role in driving India’s market forward.
