FIIs may not return to India soon; China remains a better bet: Analysts

Indian investors will have to be patient as FII inflows are not expected in the short to medium term. However, long-term view is intact

The past five months have been painful, to say the least, for Indian stock market investors. The time-wise correction, which began in October 2024, has pulled benchmark indices -- NSE Nifty and BSE Sensex have lost 11 per cent and 12 per cent from their respective peaks.  

 

In the broader markets, the drawdown has been steeper with the Nifty MidCap index down 16.36 per cent and the Nifty SmallCap index 19.11 per cent.

 

A large part of this correction, as per analysts, can be attributed to foreign investors who have pulled the plug on Indian equities. Since October 2024, foreign institutional investors (FIIs) have sold Indian stocks worth Rs 1,01,737 crore. In February alone, they sold equities worth Rs 23,710 crore. 

 

 

Notably, FIIs' withdrawal from Indian shores coincided with the China government announcing various stimulus measures to revive its faltering economic growth.

 

As per a report by Motilal Oswal Financial Services, the MSCI India index had been on an uptrend between January 2024 and September 2024. It, briefly, outperformed the MSCI China index between June 2024 and September 2024. However, since then, the MSCI China index has sharply overtaken the MSCI India index.

 

"The valuation in China (Shanghai Shenzhen CSI 300 index's valuation trades at 16.2x against 5-year/10-year average at 15.3x/15.2x respectively.) remains very attractive from a medium to short-term perspective. Some hedge funds and high-risk money have been going to China," said Kranthi Bathini, director - equity strategy, WealthMills Securities. India Nifty, by comparison, trades at 21.3x against its historical average of  5-year/10-year at 23.9x/22.8x respectively.

 

Meanwhile, MSCI India and MSCI China indices have underperformed all the major global market indices (UK, France, Japan, South Korea, Japan, MSCI EM) in CY25 on a year-to-date (Y-T-D) basis, declining 2 per cent each in US dollar terms. 

 

In fact, FPI flows into all key emerging markets (except Thailand) have been negative thus far in the month of February, data by Kotak Securities shows.

 

India, Brazil, Indonesia, Malaysia, The Philippines, South Korea, Taiwan, and Vietnam witnessed outflows of $2,189 million, $21 million, $381 million, $59 million, $5 million, $276 million, $1,114 million, and $235 million, respectively. However, Thailand witnessed inflows of $17 million.

 

This, analysts said, was on the back of a stronger US dollar amid US President Donald Trump's protectionist policies.

 

Going ahead, Indian investors, analysts said, will have to keep their calm as incremental foreign flows are expected to stay with China in the short to medium-term.

 

"The basic reason behind the relentless FII selling, which has impacted the market, was the high valuation of Indian stock markets. The December quarter (Q3FY25) results indicate around 7-per cent earnings growth for India Inc, which does not deserve high valuations. The rising US dollar has only aggravated the problem," said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

 

From a long-term perspective, analysts believe foreign flows will likely return to India on strong growth prospects.

 

"India's macros are strong and a growth and earnings recovery are on the cards. Separately, inflation in the US is likely to rise due to Trump's tariffs. The US Fed is likely to respond hawkishly to that, which will pull the US markets and dollar down, supporting foreign flows over the longer-term," Vijayakumar added.

Trump's reciprocal tariffs

US President Donald Trump has inked a new initiative to implement reciprocal tariffs on each trading partner. Reciprocal tariffs are measures to ensure equitable trade by adjusting tariffs to match those imposed by trading partners.

 

This, Gaurang Shah, head investment strategist at Geojit Financial Services said, may dent foreign flows into Asia's largest economy.

 

However, Bathini reckoned that both, the US and China, are heavily dependent on each other for trade. Thus, they could find an amicable negotiation before the tariffs kick in. 

 

As for India, which Trump claims has the most tariffs across Asian countries, Shah believes FIIs will take their own sweet time unless there is clarity in terms of tariffs between India and the US.