Foreign Investors Withdraw $3.5 Billion from Indian Stock Markets Amid Election Risks and China’s Appeal

New Delhi, India — Foreign investors have pulled a net total of $3.5 billion out of India’s stock markets in May, marking the largest outflow since June 2023. The primary drivers behind this trend are election uncertainties and elevated valuations in India.

Election Uncertainties

Investors are closely monitoring the ongoing state elections in India. While Prime Minister Narendra Modi is widely expected to secure a third successive five-year term, there are concerns that a less decisive electoral performance could limit his ability to implement crucial economic reforms. As a result, Indian equities have become less appealing to foreign funds.

Valuation Gap

The valuation gap between Indian and Chinese markets has widened significantly. Foreign investors are increasingly turning their attention to cheaper alternatives, such as Chinese stocks. Despite trading at nearly half the valuation of its Indian counterpart based on 12-month forward earnings estimates, China’s MSCI Index has outperformed India’s MSCI Index year-to-date.

Rotation Toward China

The shift toward Chinese stocks may stall as China’s earnings outlook improves. The dynamic relationship between the two major emerging markets is evident, where selloffs in India lead to capital flowing into China and vice versa.

In summary, foreign investors are closely monitoring India’s election outcomes while seeking better value propositions elsewhere. The tug-of-war between India and China continues to shape investment decisions in these critical markets.