Largest fund outflows from India since 2022; Japanese retail investors begin exit after six years

The global fund flow data indicates a potential end to a major cycle of foreign fund allocations into India, with a softer trend likely to persist.

| Updated: 25 November, 2024 5:30 pm IST

NEW DELHI: India-dedicated funds witnessed an outflow of $302 million last week, the largest since June 2022. Recent data from Elara Securities reveals that combined with allocation funds, the total outflow reached $569 million, marking the most substantial exodus since March 2022. Historically, such outflows have signaled short-term market bottoms but have also dampened long-term trends.

According to the report, the global fund flow data indicates a potential end to a major cycle of foreign fund allocations into India, with a softer trend likely to persist. Notably, Japanese retail funds, a critical source of inflows, have turned negative for the first time since January 2018. During the current cycle, which began in November 2022, Japanese retail funds had funneled $8.6 billion into India, supplemented by $2.1 billion from institutional investors. However, the recent reversal could signal a turning point, as retail flows tend to be sticky on either side of the trade.

Meanwhile, global investors are turning their focus toward U.S. markets following the post-election euphoria. U.S.-dedicated funds attracted an inflow of $110 billion over the past three weeks, including a record $57.6 billion last week, according to EPFR data. Of this, $73 billion (67%) was directed into domestic funds, while $24 billion (22%) went to Ireland-domiciled funds. Canada and Japan-domiciled funds investing in U.S. markets also received $2.6 billion each.

U.S. small-cap funds are experiencing a revival, attracting $10.7 billion over the past three weeks. This shift in investor sentiment is drawing funds away from emerging markets like India, China, Taiwan, and South Korea. The exodus coincides with a depreciation of several currencies against the U.S. dollar.

Globally, while risk appetite remains intact, momentum has slowed. Junk bonds are still attracting strong flows, but equity flows into emerging markets have softened. Additionally, emerging market bonds and commodities have struggled to recover meaningfully in this cycle over the past year.

India now faces a challenging landscape, with outflows from traditional sources like Japan and increasing global interest in U.S. assets potentially reshaping the country’s investment narrative.