Foreign investors, including sovereign wealth funds, hedge funds and long-only funds are interested in the Indian stock markets, but they are unwilling to enter or invest in the market at current inflated valuations and are waiting for a meaningful correction.

India is receiving more attention than ever before from global investors, partly because its weightage in the MSCI Index has risen while that of China has gone down, and partly because the growth in the Indian economy is seen as sustaining in the long term with consistent economic policies due to the political stability of the current administration. “FPIs are convinced about the long-term story of India,” said Pratik Gupta, CEO and co-head, Kotak Institutional Equities.

Gupta was summarising the mood and all-round optimism seen at the recent conference held by the broker which saw over 1,000 institutions participating, including over 250 foreign investors.

Many of the foreign investors, who had come with large teams, were in India for the first time, said Gupta adding that while they had no intention of investing right away they were here to learn more about the Indian economy and the markets. They also scout around for good companies that they could invest in when the markets and the stocks had corrected from the current levels.

Eye on mid-caps

A major change that was seen this year at the conference was that FPIs were not only looking at large-cap stocks, but at mid-caps too. Earlier it was the large caps, banking, consumer, and IT sectors that held the attention of FPIs.

The steady interest from domestic institutions that were providing support to the stock markets were also reassuring for FPIs. Gupta said that around $30-35 billion were flowing into the stock markets annually from the Employees Provident Fund Organisation (through exchange traded funds) and deployment of funds coming in through systematic investment plans of mutual funds.

Cause for concern

The high stock valuations are also a source of concern for domestic institutions as steady inflows from investors mean that they have to keep investing, even at the current high prices.

In the midst of all this optimism among foreign and domestic institutional investors, the mood among the corporates appeared to be more tempered, neither bullish nor bearish, Gupta said.

There is a slowdown in the consumer sector, and this was reflected in the caution expressed by the companies about the near-term outlook. While the rural demand has not recovered there is weakness in urban demand. At the higher-end of the purchase spectrum such as luxury goods, premium properties, and top-end hotels, there was optimism since the spending there is still sustaining.

Gupta said that Kotak Institutional Equities expected the market to be range-bound this year, trading at 20.5 times of the March 2025 price to earnings multiple. “We don’t expect meaningful upside to the market in the short term.”

Its preferred sectors are large banks, life insurance companies, residential real estate, and the hospital sectors while it is cautious on many of the consumer staples and discretionary stocks.