Nifty down around 2% YTD, worst performing index this year amid FII selling
Nifty was one of the top-performing indexes in 2022 around the globe. However, with a nearly 2% fall since the beginning of 2023, the Indian benchmark barometer has emerged as one of the worst performers in 2023 among global peers. While major global equity indices have staged a bounce back in the last couple of months, the enthusiasm seems to be fading away in the India markets.
While the US’ S&P500 gained around 7% in the calendar year 2023, UK’s FTSE rose around 5%. Among the Asian peers, Hang Seng added over 8%, KOSPI by around 9% and Nikkei by around 6%.
A critical reason behind Indian markets remaining under pressure is the aggressive selling by foreign institutional investors (FII). The foreign fund outflow from Dalal Street stood at over $4 billion so far this year, as per the data available on NSDL. This massive selloff comes after the FII invested around Rs 1 trillion in the second half of 2022.
Rising interest rates amid high inflation worldwide prompted FII to dump Indian equities. The inflation in the US and UK recently surged to a multi-decade high, leading the central banks, especially the US Federal Reserve to hike interest rates to a multi-year high level. The attractive high interest rates in developed markets like Europe and US also prompted the Reserve Bank of India (RBI) to increase the benchmark repo rates by a total of 250 bps to 6.5%
The selling by foreign investors also comes amid high valuations of the domestic markets and a shift towards cheaper emerging markets. Nifty is currently trading at a P/E ratio of around 20.5x, which is at a premium to its long-term average. It is also at a premium to the emerging market peers. Therefore, as per market participants, FIIs are chasing lower valuations in underperforming markets like China and Europe.
However, the Indian markets’ elevated valuation premium can be justified due to the strong economic growth, better earnings outlook, robust domestic demand and among other factors.
Going ahead, the interest of foreign investors in Indian markets interest is likely to remain high given its long-term prospects, high growth expectations and better corporate earnings on the back of softening inflation, conducive policies and hopes of an increase in government as well as private capex. Any corrections can be seen as a buying opportunity from a long-term perspective.
This is the sixth straight repo rate hike delivered by the RBI. Since May 2022, the central bank has raised the repo rates by 250 bps.
The recent gains in gold prices can be attributed to the softening of the US Dollar index, a pullback in US bond yields, strong demand from China and India and buying by the central banks.