The Indian stock market has faced significant challenges recently, with the Nifty 50 index experiencing a 2% drop, marking its steepest decline since early October. Since the start of October, investor interest in India has decreased dramatically. The Nifty 50 index registered a 6.2% decline, the largest since March 2020. Meanwhile, the MSCI India saw a 7.7% drop, underperforming the MSCI Asia-Pacific ex-Japan and Emerging Markets indices by 2.8% and 3.3% respectively.
One notable trend during this market turmoil is the contrasting actions of domestic and foreign investors. Foreign Institutional Investors (FII) recorded a historic monthly net outflow of $10.4 billion, while Domestic Institutional Investors (DII) have shown resilience, maintaining net buying activities for 14 consecutive months, with an unprecedented $12.8 billion inflow in October. This highlights a scenario where domestic investors are stepping in as foreign investors exit.
Despite domestic investors' efforts to support the market, several macroeconomic indicators for India remain weak. The Reserve Bank of India has kept the benchmark interest rate at a high level, fueling concerns about the market's future trajectory.
The massive withdrawal of foreign capital has put the Indian stock market under pressure, affecting both large caps and mid-small cap stocks. The Nifty 50 index's recent 2% decline is part of a broader monthly drop of 6.2%, the sharpest since 2020. Analysts attribute the sell-off by FIIs to weak corporate earnings in India and concerns over high stock valuations. Additionally, some international funds are shifting focus to other emerging markets, such as China, leading to substantial capital outflows from India.
The Indian market also faces multiple economic challenges, including inflationary pressures and a slowdown in growth, further diminishing investor confidence. Notably, India's GDP growth for the three months ending June was 6.7%, the slowest in five quarters, prompting economists to express a bleak outlook for India's growth prospects.
In contrast to the foreign exit, domestic investors are showing strong buying intentions. According to a report by JPMorgan, DII net inflows hit a historic high of $12.8 billion in October, far surpassing the $3.8 billion in September. Mutual funds also purchased $10.4 billion in stocks in October, compared to $3.9 billion the previous month, while insurance funds bought $2.4 billion worth of stocks. Retail investors purchased $2.8 billion in October, a significant increase from September's $1 billion net sell-off.
Despite domestic investors stepping in, the overall economic situation in India appears bleak. India's fiscal deficit for the first half of the financial year reached only 29% of the annual target, lower than the 39% during the same period last year. Additionally, manufacturing and industrial production in India are showing notable slowdowns. JPMorgan notes that the global economic downturn is impacting India's manufacturing exports, with domestic demand remaining relatively weak, further constraining industrial production growth.
The Reserve Bank of India has decided to maintain the benchmark interest rate at 6.5% amid rising inflationary pressures. The RBI Governor emphasized the risk of rate cuts, although there's pressure for monetary policy adjustments. Analysts suggest that India might need to adopt appropriate fiscal and monetary measures to avert long-term economic stagnation.
