Mumbai: As emerging market stocks reel under the pressure of a rising dollar and fiery trade rhetoric, Indian equities are charting a different course. The nation’s benchmark BSE Sensex Index has risen 6.3% this quarter in local-currency terms, the best performance among developing nations. That’s as the MSCI Emerging Markets Index has tumbled 11%.

The world’s fastest-growing major economy is relatively insulated from trade risks due to its massive domestic market and burgeoning middle class. And while India hasn’t been immune to outflows, buying by local funds has more than made up for this and helped the Sensex to so far shrug off headwinds such as rising oil prices and a weak rupee.

“The EM pack has suffered due to outflows and a strong dollar," said Sunil Sharma, who oversees $1 billion of assets as chief investment officer at Sanctum Wealth Management Pvt. in Mumbai. “India has been resilient because of its strong economy and local flows, even as the trade war rhetoric rises."

Domestic funds have bought a net $4.5 billion of Indian shares since the end of March, compared with $2.9 billion of foreign outflows, data compiled by Bloomberg show. Much of the local buying came in April and May, when a net 24,500 crore ($3.6 billion) was pumped into equity funds amid poor returns from gold and real estate.

Data released in late May showing the economy grew 7.7% from a year earlier in the first quarter has also added to the allure of stocks.

“Domestic flows, while having moderated from peak levels, are still quite sizable and they are lending support to the market," said Harsha Upadhyaya, who oversees $3.4 billion in equities as chief investment officer at Kotak Mahindra Asset Management Co. in Mumbai.

Resilience tested

Still, the idea that Indian equities are less prone than others to global shocks may be tested if the price of oil—the nation’s top import—remains elevated and the trade skirmish worsens and drives a flight to haven assets.

The rupee has slid more than 5% this quarter and hit a record low Thursday. That’s left global funds with losses in dollar terms, and has increased the risk of the stock market becoming overly reliant on domestic buying. The upshot is that equity investors must tone down their return expectations, according to Aditya Birla Sun Life AMC Ltd.

“Equity as an asset class in India will yield moderate returns this financial year -- about 12 to 13%," said Mahesh Patil, who manages $6.3 billion of stocks at Aditya Birla, the nation’s third-largest money manager. “It’s very difficult to expect positive foreign flows in India this year."