(MENAFN- Live Mint)

Mumbai: Foreign investors have moved record sums of money from selling Indian shares in the secondary or cash market to other, better performing countries, as the Indian market maintains lofty valuations and the rupee continues to depreciate amid tariff tensions with the US.

Foreign portfolio investors or FPIs have sold cash shares worth ₹2.02 trillion in the calendar year through 1 October, per National Securities Depository Ltd (NSDL). In the same period in 2022, FPI cash outflows were at ₹1.46 trillion, the second highest in a year based on the latest data, and ₹1.21 trillion last year.

Also Read | Indian MF managers vs FPI peers: Who outperformed

Analysts say the heavy outflows could keep market gains in check until India and the US sign up on a bilateral trade deal (BTA), which has been in the works for several months now.

At Wednesday's close of 24,836.3, India's benchmark Nifty 50 traded 5.5% below its record high of 26,277.35 on 27 September last year, despite heavy buying by domestic institutional investors (DIIs), especially mutual funds. DIIs have net purchased shares worth ₹5.82 trillion so far this year, shows BSE data.

India underperforming

Underpinning the FPI pullout is the fall of the Indian rupee, which has slipped 3.5% YTD to 88.69 to the US dollar after averaging 81.63 in the preceding three years, per Bloomberg data.

Alongside, India's valuations remain elevated, more so in the face of downward revisions to earnings growth. This has forced FPIs to reallocate funds to countries with cheaper valuations, causing markets to vastly outperform India in dollar terms.

“Global markets are changing shape," said GQuant Investech founder Shankar Sharma.“Spain, Korea, South Africa, Mexico, Pakistan and Brazil are leading the charts this year, boosted by demand for commodities, cyclicals and cheaper valuations."

Also Read | Raging Trump, fleeing FPIs: Is rupee about to cross the 88-mark

Data provided by Sharma showed that the Nifty 50 ranks 24 among 29 major world equity indices in the year to 30 September, yielding a measly 0.3% return in dollar terms.

Against this, Spain's benchmark IBEX 35 has given a 51.3% return, making it the top-performing global market in dollar terms. South Korea's Kospi, which yielded 50.6% in dollar terms, ranked second, followed by South Africa's FTSE/ JSE Africa Top40 IX (46.5%), and Mexico's S&P/BVM IPC (44.7%). Even Pakistan's KSE-100 index yielded a 42.5% return in dollar terms in the same period.

The key trend-returns are spreading out beyond the usual US and India. Indeed, the US S&P sits at the 21st rank with a relatively modest 13.7% return YTD, added Sharma.

Valuations high

The attractiveness of overseas markets is amplified by India's elevated valuations relative to other countries. The Nifty 50 trades at a one-year forward price-to-earnings multiple of 19.35 times, against IBEX 35's 12.95x, Kospi's 10.34x and KSE 100's 7.85x, making those markets more attractive to foreign investors.

NSE data shows that aggregate FY26 profit growth estimates of top 200 well covered companies by market capitalization have been trimmed by 0.5% since end-June to 12.1%, with projected earnings growth as of 5 September at 11.6%.

Policy measures aim to counter tariffs

To reduce the impact of the tariff hike, a number of fiscal and monetary measures have been undertaken by the government and the Reserve Bank of India (RBI).

The Centre rationalized GST slabs to 5% and 18% from four slabs earlier, with a new 40% slab introduced for sin goods such as tobacco. On its part, the RBI has allowed banks to fund acquisitions by corporates and maintained a dovish policy stance on interest rates.

Also Read | India's IPO power shift: Domestic funds take charge as FPIs retrea

“These measures, especially on GST, could result in an uptick in corporate earnings growth from the third quarter, which may force FPIs to rethink their allocation strategy to India as valuation concerns abate," said Ambareesh Baliga, independent market analyst.“But the real kicker will come if India and US ink a tariff deal, which will result in a reversal of FPI flows and drive the market to break and sustain into new bull market territory."

Agreed Sriram Velayudhan, senior vice president at IIFL Capital Services.“Until a BTA (bilateral trade agreement) is reached, we wouldn't be able to sustain at higher levels. In the absence of a trade deal, we would remain range-bound, though markets are unlikely to fall off a cliff thanks to the domestic liquidity," said Velayudhan.

MENAFN02102025007365015876ID1110144715