India-focused offshore fund, ETFs record $803 mn net inflow in Q4

This, after 17 quarters of net outflows on the trot; experts attribute change in FPI stance to better valuations in Indian market, strong fundamentals

After 17 quarters of net outflows in a row, India-focused offshore funds and exchange traded funds (ETFs) have received net inflows for three consecutive quarters now, signalling a shift in stance of foreign investors with respect to the Indian market.

In the past three quarters (Between October 2022 and March 2023) offshore funds and ETFs have received a net of $1.8 billion, shows the latest Morningstar Offshore Fund Spy report.

Experts attribute the change in stance of foreign portfolio investors (FPIs) to improvement in valuations of the Indian market and strong fundamentals.

“There is a distinct change in the FPI strategy with a clear tilt in favour of India. In the recent past, FPIs were continuous sellers in India due to India’s premium valuations and the opportunities provided by the Chinese reopening and the relatively lower valuations in South Korea, Hong Kong and Taiwan. That phase is now over and India has once again become a favoured emerging market destination for FPIs,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

India's relative valuation to other emerging markets (EMs) has improved significantly in the past few months after rising to very high levels in the previous calendar year. Until six-seven months back, India was trading at a 90 per cent premium to its EM peers. The gap has now narrowed following a correction in Indian stocks and a simultaneous rally in EM peers. Nifty is trading at its long-term average valuations against emerging markets.

The flows into India-focused offshore ETFs have remained buoyant even when the Indian equity market struggled for most part of the last quarter of financial year 2023, the Morningstar Offshore Fund Spy report highlights.

"The markets began the year with a cautious tone ahead of the Union Budget 2023-24 and on the back of persistent fears of continued monetary policy tightening by major central banks globally. Sentiments were dented after the Fed indicated no rate cuts in 2023 until inflation is under control. But the major jolt was due to the challenges faced by the Adani Group companies, which triggered a sharp fall in the Indian equity markets," the report stated.

Among the ETF, the iShares MSCI India ETF received the highest net inflows of around $227 million.

The performance of offshore funds and ETFs have been a mixed bag in the long-term, according to the report.

"Although the category has performed slightly better over the past year, over the past three years, it has lagged the MSCI India USD Index," the report stated.