FII Inflows Return in July as Market Valuations Ease, Says Jio BlackRock

Foreign investor sentiment toward India is showing signs of a potential turnaround, with foreign institutional investor (FII) inflows returning in July following months of heavy outflows. This development, along with market valuations moving closer to long-term averages, was highlighted in the August macroeconomic outlook released by Jio BlackRock Asset Management.

The report noted that a reduction in foreign outflows in June, followed by the return of FII inflows in July, indicates that the worst of the foreign investor withdrawal may be behind the market. Although foreign investor flows remain near historical lows, the report pointed out that similar historical lows have previously been followed by a recovery in both flows and markets, suggesting that negative sentiment is largely priced into investor positions.

Concurrently, domestic investors have provided vital market support. Strong and consistent inflows from domestic mutual funds helped cushion market volatility during the period of heavy foreign selling.

Valuations have also experienced a shift. India’s 12-month forward price-to-earnings ratio has returned to its 10-year average of approximately 20 times, moving away from a sustained premium. Additionally, India’s valuation relative to emerging markets has declined back to its long-term average of around 1.4 times.

Looking beyond near-term movements, the report drew attention to India’s longer-term manufacturing prospects. Citing projections from Morgan Stanley, the outlook noted that manufacturing gross value added could grow from USD 519 billion in 2025 to USD 1.5 trillion by 2035 under a base case scenario, and up to USD 2.05 trillion under a bull case scenario.

Despite these positive indicators, the report outlined certain risks to the outlook. Urban and rural consumer confidence has dropped to its lowest level since September 2023, a trend that could impact discretionary consumption and corporate earnings. Furthermore, the report highlighted external risks, noting that the Nasdaq-100's underperformance against the S&P 500 in July marked its widest monthly gap since the dotcom bubble, underlining risks tied to concentration in mega-cap technology stocks.

Ultimately, Jio BlackRock suggests that investors distinguish between short-term market flows and India’s long-term manufacturing trajectory, while closely monitoring whether the initial uptick in foreign flows develops into a sustained reversal.

"The return of FII inflows in July, combined with valuations aligning closer to long-term averages, indicates a maturing market dynamic. While domestic mutual fund support has successfully cushioned recent volatility, businesses and investors must closely monitor domestic consumer confidence levels. Balancing short-term market fluctuations with long-term macroeconomic fundamentals, such as the expanding manufacturing sector, will be essential for sustained growth in the Indian business and startup ecosystem." — Dr. Shishir Gupta, Founder & CEO, StartupLanes