According to a Reuters poll, India’s equity markets will experience their first annual decline in seven years in 2022, as higher interest rates and weakening growth prospects reduce the chances of a quick rebound from this year’s already steep drop.
Soaring inflation in India and around the world, combined with frayed supply chains exacerbated by Russia’s invasion of Ukraine, has prompted most central banks to begin raising interest rates, resulting in large outflows from risky assets.
The benchmark BSE Sensex in India has fallen nearly 7% this year and around 12% since the index’s high of 61,475.15 on Jan. 18, a level the index was not expected to reclaim anytime soon.
That performance is still better than the MSCI all-country world index, which is down more than 16 percent for the year and came dangerously close to a bear market earlier this month, defined as a loss of 20% or more.
The BSE Sensex is expected to recoup less than half of its recent losses and gain only 3.2 percent to 56,000 by the end of 2022, according to a Reuters poll of 30 equity strategists conducted May 13-24.
If realized, the annual decline of about 4% would be the company’s first since 2015.
“There are no clear signs of Indian market volatility abating in the near term,” said Rajat Agarwal, Asia equity strategist at Societe Generale.
The unprecedented exodus of foreign portfolio investors over the past eight months seems to have undone their seven years of investments in Indian equities.
Foreign investors have net sold Indian stocks worth Rs 2.5 lakh crore, or $32 billion, since last October in one of the largest-selling sprees by the cohort ever seen on these shores, according to data available on the National Securities Depository Limited (NSDL).
Foreign investors net invested Rs 2.2 lakh crore between 2014 and 2020 in the domestic stock market, NSDL data showed. Read another way, the recent selling pressure has more than halved the Rs 4.4 lakh crore the foreign investors pumped into the domestic secondary market between 2010 and 2020.
The intense and unceasing selling by foreign investors since last October was triggered by rising global interest rates, multi-decade high inflation in Western economies, a geopolitical crisis in Eastern Europe, and rising unattractiveness of Indian stocks because of their rich valuations.
India is not alone in seeing net outflows from foreign investors. Emerging markets like Taiwan and South Korea, which also made big money for FPIs in 2020, have also seen sharp outflows from their equity market due to policy shocks and the slowdown in the local economy.
Despite unprecedented selling by foreign investors, the benchmark Nifty 50 index has fallen only 8% since October, outperforming major markets such as the US, China, and Europe.
The emerging buying power of retail investors and domestic institutional investors deserves credit for keeping Indian markets from collapsing as a result of the extent of selling by foreign investors.