FII inflows return in July as India’s market valuations ease, says Jio BlackRock

In July, foreign institutional investor (FII) inflows began returning to India's market after a period of significant outflows, according to Jio BlackRock Asset Management's August macroeconomic outlook. This shift indicates that the peak of foreign investor withdrawal may have passed, with early signs of improving sentiment emerging in the market.

While foreign investor flows remain near historical lows, the report noted that past similar lows were followed by recovery in flows and markets. Domestic investors, however, continued to provide support, with robust mutual fund inflows helping to mitigate market volatility during the period of foreign selling. The report also highlighted a shift in market valuations, with India's 12-month forward price-to-earnings ratio returning to its 10-year average of around 20 times, and India's valuation relative to emerging markets falling back to its long-term average of around 1.4 times.

While the report presented India's longer-term manufacturing potential, citing Morgan Stanley projections that manufacturing gross value added could grow from USD 519 billion in 2025 to USD 1.5 trillion by 2035 in the base case, it also warned of risks. These risks included falling urban and rural consumer confidence, which could negatively impact discretionary consumption and corporate earnings, and a widening gap in the performance of the Nasdaq-100 relative to the S&P 500 in July, signaling potential risks from concentration in mega-cap technology stocks.

The report emphasized the need to distinguish short-term market flows from India's longer-term manufacturing trajectory, and suggested that investors monitor whether the early improvement in foreign flows leads to a sustained reversal of sentiment.