The Curious Case of India’s Foreigner-Free Bull Run

You’d think a multi-year bull market in one of the world’s largest economies would have foreign investors falling over themselves to get in. Yet new research shows something rather striking: foreign institutional investors have put just $10 billion into Indian equities since January 2021, even as domestic institutions have poured in a whopping $160 billion over the same period.

The divergence has become particularly acute of late, with foreign investors pulling $10 billion from Indian stocks in October 2024 alone, pushing foreign institutional ownership to a decade-low of 17.6%, Bank of America wrote on Tuesday. India’s weighting in emerging market funds has similarly plunged to -31 basis points, its lowest level in ten years. What makes this particularly interesting is that Indian markets have powered ahead regardless.

The Nifty index is trading at a 10% premium to its long-term average despite this remarkably tepid foreign participation, raising questions about just how sustainable the rally might be if domestic flows — which BofA describes as “the only positive supporting markets” — were to slow. The timing of October’s foreign outflows may prove particularly unfortunate.

BofA’s US economics team is warning of a potential 90 basis point upside risk to US inflation if Washington moves ahead with mooted 60% tariff hikes on Chinese imports. Any such inflationary surprise could delay the Federal Reserve’s rate cutting cycle, potentially accelerating foreign outflows from emerging markets like India.

This matters because the domestic bid supporting Indian equities is already being offset by an unprecedented wave of equity issuance. Year-to-date equity fundraising has hit $53 billion, nearly matching the combined $55 billion of domestic and foreign institutional inflows.

The market’s reliance on continued robust domestic flows is becoming increasingly precarious. The question now is whether foreign investors are being overly cautious or if domestic investors have become too exuberant. Either way, when a market rally of this magnitude occurs with such minimal foreign participation, it’s worth paying attention to what happens next.