Foreign investors abandon Indian stocks amid economic slowdown

India's stock market has faced significant challenges recently, primarily due to a notable decline in foreign investment over the past months. As of January 2025, foreign investors have been net sellers of Indian equities for four consecutive months, contributing to India's benchmark stock indexes, the Nifty 50 and Sensex, hitting seven-month lows. This trend is attributed to concerns over the country's economic performance, with the gross domestic product (GDP) growth in the quarter ending September 2024 recorded at just 5.4%, marking the slowest rate in the last seven quarters, prompting the government to lower growth estimates for the fiscal year. The data from India's National Securities Depository indicates that foreign portfolio investor flows decreased dramatically, dropping 99% to only $124 million in 2024 compared to the prior year. Concerns regarding an economic slowdown in India, coinciding with rising U.S. Treasury yields, have fueled the outflow of foreign investments. As foreign institutional investors have actively engaged in profit booking, the Indian equity markets have faced mounting pressure. While foreign investors exit, domestic investors have countered some of the market's decline. Since October, local investors have infused approximately $27 billion into Indian equities, mitigating what could have been a more severe downturn. The surge of retail investors, many of whom are investing in stocks with questionable fundamentals, is a notable trend contributing to the elevated market valuations despite the overall economic uncertainties. Some analysts suggest that the market correction, although challenging in the short term, could ultimately lead to more sustainable valuations and attract new investors in the long run. They argue that the rapid growth of the Indian equity markets in 2023 and 2024 may have been excessive, and the current market environment presents opportunities for astute investors. By adjusting valuations through this corrective phase, India may become an attractive destination for investment once again, particularly in sectors like IT and private banking, as the long-term potential remains promising despite current conditions.