Foreign flows in India underperformed China by 10% from its peak: Elara Capital

Initial signs of slowdown are being witnessed in foreign inflows in India, with total inflows into India dedicated funds of $144 million (Large + Mid+ Small) are slowest since May 2023, according to a report by brokerage firm Elara Capital.

The report further said that India has underperformed China in terms of foreign inflows by over 10 per cent from the peak and the largest deviation since October 2022.

"India has underperformed China by 10% from the peak, largest since Oct’22 period. This could be another trigger for liquidity shifting back into China for some time," the brokerage firm said in its report.

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Whereas, US is also witnessing a cool-off in foreign flows. However, US smallcap flows continues to show strong momentum since Jan 2024. 

“After record inflow of $56bn in the US last week, we saw flows cooling off with outflow of $22.6bn. US Smallcap flows continue to show strong momentum since the beginning of 2024. EM flows have remained relatively soft since the past few weeks not showing any significant trend,” the report said.

According to the report, the slowdown in India is primarily due to big outflow of $256mn from Luxemburg domiciled funds while inflows from US and Japan domiciled funds also dropped by 55%-65% from average levels.

India dedicated Long-only funds saw their first redemption of $184mn in 1-year. India midcap funds had started taking slower outflows since Jan’24 but pace has finally started expanding.

India remains strong in ETFs

The Elara report further added that in CY23, India saw strong liquidity from both Foreign and Domestic investors. “Only place where India flows remain relatively strong was in ETFs,” it said.

This created a frenzy in Small and Midcap space. Currently, the foreign liquidity is drying up in SMID space which can slow down the price momentum. Need to closely monitor how the domestic liquidity shapes up from here, it said.

Also read: Foreign investors inject over $4 billion annually into Indian real estate: Colliers report

In the past, Indian Midcap funds experienced significant inflows during the periods of 2014-2015 and 2017-2018. During the redemption cycle of 2016, Midcap stocks remained resilient, benefiting from robust domestic flows following Demonetization. However, in the redemption cycle spanning 2018-2020, Midcap stocks faced substantial losses as domestic liquidity also decreased significantly.