Foreign institutional investors are showing signs of caution after months of strong engagement with India’s stock market. Despite India’s rapid economic growth, projected by the IMF to reach 7% this year, global investors appear to be pulling back. Over the past year, Indian stocks have surged 40%, but this surge has led to valuations that some consider overinflated. The MSCI India index’s forward price-to-earnings ratio now stands at 24, about 25% above its ten-year average. This valuation gap, particularly when compared to other Asian markets, has reached a record high, prompting global institutional investors to withdraw $1 billion more from India’s stock market than they invested in August, according to Bloomberg.
Domestic investors, particularly younger ones, have been stepping in to fill the void left by foreign investors. Since 2022, Indian retail investors have poured $70 billion into the market, shifting away from traditional investments like gold and real estate. However, there are concerns that these younger investors may not fully grasp the risks, having never experienced a significant market downturn.
Meanwhile, ongoing trade tensions between the US and China are pushing international companies to shift their supply chains to other developing countries, with India being a prime destination. This shift is expected to bring increased investment and job creation, further bolstering India’s economic momentum.
