Foreign investors say India easiest market to sell. Is there a chance of recovery?
This will give you a perspective of how foreign investors think and answer a burning question "is there a chance of recovery anytime soon?"
Indian market was the go to market for all kinds of investors a few months ago. It was officially called the safe haven in the world full of uncertainties and wars. However, in the last 6 months, FIIs have turns to be net sellers - selling about INR 2.72 lakh crore from the markets. One of the biggest reasons of downfall of the markets and reversal of sentiments and investor confidence.
Source: moneycontrol.com, Indigenous Investors
The three main reasons why the foreign investors have gone out of India are -
Earnings growth has come under question
Given the valuations that India has right now, the companies need to grow at least by 15% on an average to sustain the growth story. This doesn’t seem to be the case with corporate India yet as the cumulative growth of last 3 quarters has barely crossed 7%. In order to make sense of the valuations that we have right now, corporate India will have to show growth of 8% at least only in the current three months.
This is highly unlikely considering the current business, Marco-economic and global scenario. Yes the RBI has decreased the rates but 0.25% in 5 years is pretty insignificant and the market will take its own time to adjust to the new rates.
US bond yields have started increasing
The US bond yields have increased from 3.6% in September 2024 to 4.42% in February 2025 and there is a negative relationship between Indian markets and US Bond yields.
Source: CNBC
Whenever the US Bond yields increase, foreign investors remove money from the markets globally to park the money back into US as these bonds are considered to be the safest investment option (lot safer than bonds issued by any other government in the world).
China is outperforming
Chinese equities have turned out of favour since last 3 years. Because of this, the equities are available extremely cheap even with a decent growth potential. Even if we consider that the returns generated by India and China will be similar, given an option to choose between a country with extremely high valuations and extremely cheap valuations, the no-brainer answer is to go with the one that is cheaper.
Is there a chance of recovery in Indian markets?
Unless India shows an immensely robust earnings growth (15% or higher as mentioned above), these valuations will not be sustained and investors will keep withdrawing from the market until the prices get down to a reasonable level. Bear in mind that consistent selloff in the markets will also turn the sentiments extremely negative and that of panic which will further take the markets down.
To add salt to the wounds, if China or any other emerging market like Indonesia, Middle East, Mexico or Brazil show promise, Indian markets will go further out of favour.
At the same time, if the US starts imposing tariffs (which we are already seeing), the prices of daily items will go up in the US and inflation will increase. This will prompt the central bank (the FED) to further increase interest rates which will further increase the bond yields and I have already explained above the negative correlation between bond yields and equity markets.
It does not feel ideal that the fate of the Indian markets - or any markets for that matter - depend on the factors that are beyond the control or reach of such markets. However, we are living in a hyper-globalised world and actions of one region directly impact the valuations of another.
Truly speaking, this fall of the markets was well expected, and considering all the factors around, it feels it may go further down. It is an act of cleansing of sorts. As long term investors, it feels scary to invest big sums of money at such high valuations and expect attractive returns.
If you wish to read the Business Standard full article, please click here.
This article is meant to throw light on the current scenario and is not to be construed as investment advice. The author of this article is a SEBI registered Research Analyst having registration number NISM-202300019644