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The Indian stock market is currently experiencing a significant downturn fueled by a massive sell-off by Foreign Portfolio Investors (FPIs). Over the past month and a half, FPIs have withdrawn a staggering ₹1.56 lakh crore (approximately $18.7 billion USD), marking the largest consecutive selling streak in recorded history. This unprecedented outflow has sent the market into a correction, pushing major indices to five-month lows and significantly impacting investor sentiment. The timing of this sell-off coincides with serious bribery allegations leveled against Gautam Adani, chairman of the Adani Group, by US prosecutors. This confluence of events has raised serious concerns about the future trajectory of the Indian economy and the potential for further market instability.
The allegations against Adani stem from a $265 million bribery scheme allegedly designed to secure lucrative contracts for a solar power project. US prosecutors claim the Adani Green bond issuance in September 2021, which included $175 million from US investors, contained misleading statements about anti-corruption measures, thereby potentially deceiving investors. The Adani Group vehemently denies these allegations, labeling them as 'baseless.' However, the mere existence of these accusations has cast a shadow over the market, further exacerbating the already precarious situation caused by the FPI sell-off. While the Adani Group's direct impact on the overall Indian stock market is relatively limited due to its comparatively low weighting in benchmark indices, the indictment carries significant symbolic weight, raising concerns about broader corporate governance issues and potentially eroding investor confidence in the Indian market.
Despite the current turmoil, several experts maintain a cautiously optimistic outlook for the long-term prospects of the Indian economy. Riya Oswal Bafna, Co-Fund Manager at Purnartha, highlights India's compelling growth story, emphasizing the country's young demographic dividend, rising per capita income, and increased fiscal spending as key indicators of robust future growth. She believes that the current FPI sell-off is a temporary phenomenon, a 'one-off event' that should not significantly impact long-term investor sentiment. This perspective contrasts with the immediate market reaction, which has clearly been negative, suggesting a disconnect between the short-term anxieties and the long-term potential that some experts see in the Indian economy.
However, the reasons behind the current FPI outflow extend beyond the Adani allegations. Several contributing factors are at play, including improved risk-reward profiles in the US market following the recent election, the strengthening US dollar, and comparatively cheaper valuations in the Chinese market. These global macroeconomic factors are creating compelling alternative investment opportunities for FPIs, pulling capital away from Indian equities. Oswal Bafna suggests that the situation is likely to remain uncertain until March, when more clarity is expected regarding the unfolding global economic landscape and the implications of the recent US presidential election and consequent policy decisions. Until then, FPIs are expected to maintain a cautious stance, limiting their investments in the Indian market.
Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, offers a more nuanced perspective on the FPI exodus. He identifies three primary drivers: the 'Sell India, Buy China' trade, concerns surrounding FY25 earnings, and the so-called 'Trump trade.' He believes the 'Sell India, Buy China' trade is largely over, and the 'Trump trade' is also nearing its end due to high valuations in the US. This analysis suggests that the FPI sell-off may soon abate. Furthermore, Dr. Vijayakumar points to the resilience of certain sectors, such as IT and banking, which have shown some resistance to the overall market downturn, indicating that the situation may be more nuanced and less uniformly negative than some might fear. The decline in valuations of large-cap Indian stocks is also potentially attractive to value-oriented investors, suggesting that the current sell-off may be creating attractive buying opportunities for those willing to take on the perceived risk.
In conclusion, the current market turmoil in India is a complex interplay of various factors, with the Adani allegations adding to the pre-existing pressure from global economic forces and shifts in investor sentiment. While the short-term outlook remains uncertain and characterized by significant volatility, the long-term potential of the Indian economy remains a subject of debate. While some experts express concern over the impact of the bribery allegations and the broader FPI sell-off, others remain optimistic about India's long-term growth prospects, emphasizing factors such as the country's young population, rising income levels, and continued government investment. The coming months will be critical in determining whether the current downturn is merely a temporary setback or a more significant indication of underlying challenges in the Indian economy.
Source: Will bribery allegations against Adani intensify FPI selling spree in Indian markets?