Foreign investors withdrew large sums of money due to rising global interest rates and a weakening local currency, despite world-beating returns.
The Indian stock market may have the reputation of providing the best returns among its peers in 2022, but it is on track to record the highest ever withdrawal of money by foreign portfolio investors.With global central banks raising interest rates and the rupee weakening, foreign investors withdrew money from the domestic stock market at a record pace in the first half of the year, before reinvesting some of it in the second half.
However, according to Securities and Exchange Board of India data, FPIs have withdrawn $18.1 billion from the Indian stock market as of December, which is more than the $13.3 billion withdrawn by the same cohort during the 2008 global financial crisis.However, the record pace of outflows from foreign investors, who own nearly 40% of the market's free float, has had little impact on the stock market's performance.The MSCI India index, which is followed by the majority of global investors and funds, has returned 6.6 percent in local currency year to date, making it the best performing stock market among those with a market capitalisation of more than $1 trillion.
In comparison, the MSCI All Country World Index has fallen 17% in 2022, while the MSCI Emerging Markets Index has fallen 21% this year.
Despite foreign investors losing money, the Indian market has performed better than its developed peers in US dollar terms. So far in 2022, dollar returns on the Nifty 50 have fallen by 4.3 percent, compared to a 16 percent drop for the S&P 500 and a 19 percent drop for the Shanghai Composite.
Domestic institutional investors (DIIs) are expected to record record inflows, offsetting FPI selling. DIIs have net purchased $30 billion in local stocks this year.
"From a fundamental standpoint, India has improved in the last year or so... "The market expects fairly strong economic growth in India over the next 3-5 years," Pramod Gubbi, founder of Marcellus Investment Managers, told Moneycontrol.
However, foreign investors have recently become more optimistic about the Indian stock market.Since July, FPIs have made net investments totaling $11.5 billion, owing to rising market confidence that global interest rates will soon peak and India's economy being perceived to be in a better position than other large economies.According to a World Bank report released on December 6, India will be less affected by global economic headwinds than the rest of the world. Furthermore, after a record sell-off in 2022, a new capital expenditure cycle, strong earnings growth expectations, and a relatively benign inflation situation are likely to help the Indian stock market attract foreign investors in 2023.
Analysts believe that as China's attractiveness fades due to rising regulatory and political instability, foreign capital will be drawn to Indian shores due to a lack of investable options in the emerging market basket. In a recent outlook note for 2023, Morgan Stanley strategists stated, "Our colleagues see a structural boom ahead for India."
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