Indian Stocks Face Further Decline Amid Sell-Off by Foreign Investors

Indian equities are poised for continued losses as foreign investors resume share sales amid concerns over sluggish consumption and tepid earnings growth.

In January, global funds withdrew $5.4 billion from Indian equities, marking the worst start to a year since 2022. Despite robust inflows into mutual funds, foreign selling has eroded much of that support.

Asia's third-largest economy is facing its slowest expansion since the pandemic, intensifying growth concerns. The Nifty 50 Index has fallen nearly 12% from its September peak, with weak corporate results crushing hopes of a near-term recovery.

"Foreign investors may continue to exit India due to earnings challenges and a slowdown in certain consumption sectors," said Nitin Chanduka, strategist at Bloomberg Intelligence.

Foreigners have primarily targeted financials, energy, and growth-sensitive sectors. Since October, global funds have withdrawn over $17 billion from South Asian equities.

Current earnings season results indicate only three out of 11 Nifty 50 members have exceeded estimates. "Most sectors have posted lower earnings, and the outlook for Q3 remains unimpressive," said Kunal Vora, head of India equity research at BNP Paribas.

Urban demand will be a focus when Hindustan Unilever releases its earnings report on Wednesday. The consumer goods giant is expected to report subdued volume and revenue growth, as urban demand has lagged behind rural areas for three quarters.

Expectations of a shift towards China could further impact foreign demand for Indian assets. US President Trump's softer tariff stance on China may entice capital away from India.

"China may strike a deal with the US, leading to a rotation of investments," said Kok Hoong Wong, head of institutional equities at Maybank Securities.

Indian stocks remain expensive, trading at close to 19 times forward earnings. Investors eagerly anticipate the federal budget announcement on February 1st for measures to stimulate consumption and bolster growth.

"India remains off investors' radar, with most expecting further market declines," noted a Bank of America report citing a fund manager survey.