The fund flow activity in the Indian equity market continues to see selling pressure for a fifth month in a row, with bulk of the selling coming from India-dedicated funds, a note by Elara Capital has said.
Elara Capital’s ‘Alternate Opinion Quantitative & Alternates’ report said on February 14 that the redemption has surpassed $405 million for the week, out of which $238 million comes from India-dedicated funds.
Dedicated funds are set aside for a specific purpose or strategy, and can be a mutual fund, exchange-traded fund (ETF).
The redemption pressure is seen not only from US-based funds, even UK-based funds have been pulling out of India at a steady pace since November 2024, with total outflow at $435 million. There is significant selling pressure from other regions as well, like Ireland (-$103 million), Luxemburg (-$88 million) and Japan (-$46 million).
The data shared by Elara underscores how the US continues to funnel capital into India through ETFs, which are often passive, low-cost investments, while fund flow from other regions are mostly through active funds. The outflows, together, are inducing significant correction in the Indian equity market.
Out of the total JPY-denominated exposure in India, construction and banking bets in India are currently at their lowest levels in 10 years, and capital goods/utilities are reversing from highs.
The Elara note said India is currently experiencing a ‘euphoric top’ in the performance of India-dedicated funds, similar to what was last seen in 2018, indicating that the equity market could be nearing a market correction, or pause. There is still a potential cushion, or level, according to the note, where Indian equity markets could stabilize for the time being. However, if that support breaks, it could indicate a more significant downturn.
The note said that the US market fund flow is witnessing a slowdown, signaling a growing concern of overheating or potential market correction in US equities as well, leading to conservative positioning by the funds.
Fund Flow into Europe, China
On the contrary, in European equities, the monthly fund flow stands at $2.5 billion as of December 2024, its highest level since January 2023. Germany has led the highest of these inflows, at $930 million, followed by Switzerland at $824 million, France with $658 million and Netherlands with $344 million. Investors are perhaps betting on the European economy catching up to the US in terms of growth, or at least offering more stability and less volatility, in light of ongoing geopolitical shifts, the note said.
There’s improvement in foreign inflow into China since the past two weeks, said Elara, taking the investment to $573 million MTD, largest since October 2024. This reflects a shift in global fund managers’ actions, moving from India towards China. The commodity bet on China has also revived, with EM Commodity/Materials fund witnessing its largest monthly inflow since August 2023 at $92 million. This marks a steady revival of flow into commodity funds from the recent lows.
India’s long-standing growth narrative may be coming under pressure, said the Elara note, as some global investors are moving their capital out, in light of macro headwinds in the emerging markets.
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