Global Funds Revisit Indian Stocks As Oil Rupee Risks Recede

Global fund managers are reassessing their retreat from Indian equities as a swift drop in oil prices to pre‑Iran war levels and measures to stabilize the rupee have soothed key pain points for investment in Asia's third largest economy. Exchange data shows daily selling by global funds has slowed markedly in recent weeks. Meanwhile, analysis by Elara Capital reveals that inflows into U.S.-listed India-focused exchange traded funds turned positive last week for the first time in more than a month. Two key headwinds have eased, said Todd McClone, a portfolio manager at William Blair Investment ‌Management, which oversees about $65 ⁠billion. India is ⁠among the most oversold markets we track, he said. This macro improvement, alongside a more attractive valuation premium, strengthens the case to act. India imports nearly 90% of its crude requirements, making it one of the world's most vulnerable economies to the Middle East oil shock. Those high energy costs alongside sustained foreign selling of Indian assets pushed the rupee to a record low in May, depressing returns for foreign currency holders. Overseas investors cited stretched valuations alongside FX and oil risks for reallocating capital elsewhere. India's fall from grace also coincided with a global rotation into technology-heavy markets, with South Korea and Taiwan emerging as particular winners of the AI boom. Average allocations to India among emerging market ⁠funds dropped ‌below 10% in April for the first time since early 2021, from a peak of 17.5% in August of 2024, according to figures from Copley Fund Research. Now though, the tide may be turning, with currency and crude pressures easing, ⁠and valuations in high-tech stocks showing signs of excess. We have gradually reduced our India underweight in the pan-Asia strategies, primarily by doubling down on existing high-conviction holdings, said Vikas Pershad, a portfolio manager at M&G, which manages roughly $450 billion. The additional capital was freed up by scaling back positions in South Korea and Taiwan, he said.RUPEE RECOVERY The rupee, which had been under sustained pressure for months, found relief not only from crude's retreat, but from central bank measures to encourage dollar inflows. The Indian currency has recovered to around 94.50 per dollar from an all-time low near 97 on May 20 to be among the best-performing Asian currencies in June. The rupee's weakness had depressed dollar returns, leaving the MSCI India index sharply trailing emerging ‌market peers. Christina Woon, head of equity income at Eastspring Investments, which oversees $270 billion, said she is incrementally more positive on India. Valuation opportunities have opened up over the past few months, so on a selective basis, we would be keen to engage, she said.SPOTLIGHT ON EARNINGS Still, many fund managers ⁠caution that a long-term rerating of the market would require earnings support. Improved currency stability and lower oil prices alone are unlikely to change investors views on Indian equities in the near term, though they may provide a more supportive macro backdrop, said Peeyush Mittal, a portfolio manager at Matthews Asia, which has about $7.7 billion under management. India's earnings growth has been limited to single digits in the past two fiscal years. However, analysts predict that will accelerate to the mid-teens in the current and coming fiscal year. India is not a low-growth or broken story, but it is a market where valuations remain relatively full, said Ninghui Liu, head of APAC investment strategy at State Street Investment Management, which manages $5.6 trillion. So the bar for increasing allocation is quite clear: We need to see sustained earnings recovery coming through.