Despite major economic reforms by the Modi government, India has lost out as an attractive market for foreign investors, who are now preferring North Asian countries such as China, Korea, and Taiwan for investment.
The year began on a dramatic note for Indian equities with the surprise announcement of the demonetisation of two high currency notes in the country last November.
This was followed by the recapitalisation plan in October to strengthen the $32.4 billion public sector banks, which failed to impress foreign investors.
Data from the National Securities Depository Limited (NSDL) showed that foreign investors only added $710,000 in net inflows into bank stocks in November.
Suresh Tantia, Asia Pacific investment strategist at Credit Suisse Private Banking said: ‘Investors are booking profits because banks went up 30% in one day and investors see a lot of challenges in terms of execution risk.
‘There is uncertainty over how it will be funded, whether it’ll come through the budget or whether banks will have to subscribe to bonds issued by government so they can recapitalise public sector banks,’ he added.
This is part of a bigger story since July, when the government announced an overhaul of the system used to tax goods and services in India.
August and September saw net outflows by foreign investors, which reversed in October and November, but have since resumed in December.
According to NSDL, as of 21 December, foreign portfolio and institutional investors had withdrawn INR 5924 crores ($924 million) in the months following the GST announcement.
‘The developments in China probably had some impact on this, as well as the domestic situation in India,’ said Jon Harrison, managing director for emerging market macro strategy at research firm TS Lombard.
‘Up until the middle of the year, India and China were moving in sync in a very positive emerging market sentiment globally. But from mid-year we had two things - GST implementation in India and in China, there was a strong improvement in global sentiment.’
China’s reforms to stall capital outflows and its impact on currency, opening of financial markets and deleveraging have also helped its case.
‘The incremental investment [in India] is very low from foreign investors,' Tantia said.
'So whatever fresh money the fund managers are putting in is coming into North Asian markets – China, Korea, Taiwan - because those markets are cyclical markets, whenever the global economy is doing well you’ll see acceleration in earnings growth and the economy,' he explained.
Credit Suisse Private Banking is neutral on Indian equities in the short-term and is not adding to its positions for 2018.
However, TS Lombard’s director India research, Shumita Deveshwar, is optimistic on the market for next year despite political risks in the last year of Modi’s first term and the potential for oil prices to rear their ugly head.
‘These have been painful adjustments but the government has gone ahead and done them. That's why the mood is upbeat because maybe the government is going to do further reforms, especially if Modi gets re-elected in 2019,’ she said.