Foreign institutional inflows returned in July after months of heavy selling, while Indian market valuations moved closer to long-term averages and domestic investors continued to provide support
India may be showing early signs of a turnaround in foreign investor sentiment, with foreign institutional investor (FII) inflows returning in July after months of heavy selling, according to Jio BlackRock Asset Management’s August macroeconomic outlook.
The report said the slowdown in foreign outflows in June, followed by a return of FII inflows in July, suggests that the worst of the foreign investor withdrawal from Indian markets may be behind. The shift offers an early indication of improving sentiment, although investors will need to assess whether the recent recovery in flows can develop into a sustained trend.
Foreign investor flows into India remain close to historical lows. However, Jio BlackRock noted that similar periods of weak foreign flows in the past have often been followed by a recovery in both capital flows and equity markets. This indicates that a significant portion of the current negative sentiment may already be reflected in investor positions.
Domestic investors have meanwhile continued to provide an important cushion to the market. Strong and consistent inflows into domestic mutual funds have helped absorb some of the impact of foreign selling and limited market volatility during the period of sustained FII outflows.
Indian equity valuations have also become more attractive after trading at a prolonged premium. India’s 12-month forward price-to-earnings ratio has returned to its 10-year average of around 20 times. The valuation premium of Indian equities relative to emerging markets has also declined to its long-term average of around 1.4 times.
More from BusinessBeyond near-term market flows, the report highlighted India’s longer-term manufacturing opportunity. Citing Morgan Stanley projections, it said manufacturing gross value added could increase from $519 billion in 2025 to $1.5 trillion by 2035 under its base-case scenario. In a bull-case scenario, manufacturing GVA could rise to as much as $2.05 trillion.
The report, however, flagged risks to the outlook. Consumer confidence in both urban and rural India has fallen to its lowest level since September 2023, which could weigh on discretionary consumption and corporate earnings.
Global equity markets also face risks from the concentration of investments in large technology companies. The Nasdaq-100’s underperformance against the S&P 500 in July was its widest monthly gap since the dotcom bubble, highlighting concerns around mega-cap technology stocks.
Overall, Jio BlackRock said investors should distinguish between short-term foreign capital flows and India’s longer-term manufacturing growth story. The return of FII inflows is an encouraging signal, but a sustained reversal in foreign investor sentiment will depend on whether the trend continues in the coming months.
