Global fund managers are reconsidering their retreat from Indian equities due to a swift drop in oil prices to pre-Iran war levels and measures to stabilize the rupee. Daily selling by global funds has slowed significantly in recent weeks, and inflows into U.S.-listed, India-focused exchange-traded funds turned positive last week for the first time in over a month, according to Elara Capital. Average allocations to India among emerging market funds had dropped below 10% in April, from a peak of 17.5% in August 2024, but this trend appears to be reversing as currency and crude pressures ease, and high-tech stock valuations show signs of excess. Vikas Pershad of M&G, which manages roughly $450 billion, stated they have gradually reduced their India underweight in their pan-Asia strategies by doubling down on existing high-conviction holdings, freeing up capital by scaling back positions in South Korea and Taiwan.
The rupee has recovered to around 94.50 per dollar from an all-time low near 97 on May 20, making it one of the best-performing Asian currencies in June. This recovery is attributed to both crude's retreat and central bank measures to encourage dollar inflows. Todd McClone, a portfolio manager at William Blair Investment Management, which oversees about $65 billion, noted that India is "among the most oversold markets we track" and that macro improvements, alongside a more attractive valuation premium, strengthen the case to invest. Christina Woon, head of equity income at Eastspring Investments, which oversees $270 billion, expressed being "incrementally more positive" on India, citing valuation opportunities that have opened up.
While improved currency stability and lower oil prices provide a more supportive macro backdrop, many fund managers caution that a long-term rerating of the market would require strong earnings support. Peeyush Mittal, a portfolio manager at Matthews Asia, which has about $7.7 billion under management, emphasizes that these factors alone are unlikely to change investors' views in the near term. India's earnings growth has been in single digits for the past two fiscal years, but analysts predict it will accelerate to mid-teens in the current and coming fiscal year. Ninghui Liu, head of APAC investment strategy at State Street Investment Management, which manages $5.6 trillion, highlights that the "bar for increasing allocation is quite clear: We need to see sustained earnings recovery coming through." Investors are also rotating out of technology-heavy markets like South Korea and Taiwan, which benefited from the AI boom, suggesting a diversification away from concentrated AI trades.
India, as one of the world's largest crude importers, stands to benefit disproportionately from lower energy prices through reduced inflation, an improving current account deficit, and stronger corporate profitability. Brent crude is now hovering around $70 a barrel, a significant decline from previous highs. This macroeconomic improvement, combined with domestic inflows and more reasonable valuations, offers an attractive opportunity for investors. Foreign institutional investors (FIIs), who had been persistent sellers of Indian equities for much of the year, turned net buyers of around ₹7,000 crore (approximately $840 million) between June 15 and July 1. This shift indicates a potential reevaluation of India's market by global funds, driven by easing commodity prices and a more stable rupee.
