India's equity lifeboat springs a leak: Highest outflows despite optimism

India has recorded the highest outflows from foreign portfolio investors (FPIs) among emerging markets (EMs) so far this month, despite steady flows from domestic investors. Bloomberg data reveals that global liquidity has not been supportive of Indian markets.

At the beginning of the month, most EMs experienced outflows due to concerns about a potential US recession and the reversal of Japanese carry trades. However, as fears of a recession abated and prospects for a US Federal Reserve (Fed) rate cut increased, outflows reversed in most markets, allowing them to recoup losses.

The benchmark S&P BSE Sensex has rebounded nearly 4 per cent from this month’s lows but remains 1 per cent below its record highs.

In August, FPIs were net sellers in India ($1.8 billion), Taiwan ($682 million), South Korea ($554 million), Thailand, and Vietnam, but net buyers in the Philippines, Malaysia, Indonesia ($873 million), and Brazil ($1.2 billion).

Market experts observe that while global allocations to the EM universe have improved, India has become the most underweight market due to concerns around high valuations.

The first half of the month saw a sharp FPI pullback driven by a rise in the US unemployment rate, challenging the ‘soft landing’ narrative. The reversal of yen carry trades following Japan’s interest rate hike also raised concerns about potential outflows from major equity markets.

However, a drop in US unemployment benefit claims and data showing a rebound in US sales revived bets on easing inflation without major economic disruption. Recent statements from US Fed Chair Jerome Powell are viewed as supportive of foreign flows into EMs.

According to U R Bhat, co-founder of Alphaniti Fintech, “Compelling data has led investors to believe the worst is over, and they’re ready to take risks in EMs. With no more data pending, the Fed’s statement makes a September rate cut quite plausible. Going forward, flows will hinge on individual country economic data and geopolitical tensions.”