Foreign Capital Returns to India's Stock Market, Boosting Valuations

Overseas funds are accelerating their inflow into the Indian stock market, propelling the market capitalization to surpass $5 trillion.

Following Prime Minister Narendra Modi's third term, investors' confidence in policy stability has been strengthened, coupled with expectations of a Federal Reserve rate cut, making the Indian stock market a global hotspot for capital pursuit.

Bloomberg data shows that net foreign purchases in the Indian stock market have reached $8.5 billion this quarter, on track to be the highest since mid-2023.

The Indian index is expected to rise for the sixth consecutive quarter, with a price-to-earnings ratio twice that of the MSCI Emerging Markets Index.

The Nifty50 index's P/E ratio has reached 21 times, significantly higher than its 10-year average.

Despite the high valuations in the Indian stock market, funds continue to flow in, with investors brimming with confidence in India's economic growth prospects.

The NSE Nifty 50 index is poised for its ninth consecutive year of gains.

Yesterday, the intraday Indian SENSEX index rose by 1.7%, setting a new historical high.

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In dollar terms, the MSCI India Index has risen by 7% this quarter, while the broader emerging market stock index has risen by about 2%.

"Despite high valuations, the Indian stock market remains attractive compared to other markets with weaker growth prospects," said James Cheo, Chief Investment Officer for Southeast Asia and India at HSBC Global Private Banking and Wealth Management in Singapore.

"India's growth is supported by strong corporate performance and favorable economic conditions."

The International Monetary Fund predicts that by 2028, India will become the world's third-largest economy, and Bloomberg Intelligence suggests that by then, India could be the largest contributor to global growth.

In September, overseas funds are expected to flow into the Indian stock market for the fourth consecutive month.

Despite not winning an absolute majority in the June elections, Modi's party successfully formed a coalition government, stabilizing the political situation and boosting investor confidence.

Moreover, India's primary market is also becoming a darling of global capital, becoming the busiest market globally this quarter.

Although this year's Indian IPO market has been mainly driven by small and medium-sized deals, there have also been several billion-dollar financing projects emerging.

The Indian rupee has also gained favor with global investors.

The frequent interventions by the country's central bank have transformed the rupee from one of the most volatile currencies in Asia to one of the least volatile.

"The return of overseas investors indicates that a market offering returns cannot be ignored for long," said Sumeet Rohra, fund manager at Singapore's Smartsun Capital Pte, "and India's weight in the MSCI index has also increased significantly."