Will US Fed Rate Cut Lead To Revival Of Foreign Investment In Indian Stocks

The US Federal Reserve's 25 basis-point rate cut, with signals of more to follow, has put the spotlight on whether foreign capital will once again chase Indian equities.Lower US rates typically weaken the dollar, boosting the appeal of emerging markets like India for global investors, but this time, several Dalal Street participants are not confident of a flood of money into stocks here like in the past. This is because the appeal for India has been blunted by rich valuations and opportunities in cheaper markets like China.

"The equity allocation is expected to shift from the US to emerging markets post the cut but given the expensive valuations in India, China is likely to see higher foreign interest," said Siddarth Bhamre, head of research, Asit C Mehta Intermediates.On a provisional basis, overseas investors sold shares worth ₹2.28 lakh crore so far this year. In September, foreign selling ebbed with these investors offloading shares worth ₹10,596.7 crore provisionally, after selling to the tune of over ₹80,000 crore in July and August combined.The slowing pace of foreign selling this month has raised expectations of a gradual revival in inflows."The pace of sell-off is slowing, but global investors continue to believe India is expensive," said Nilesh Shah, MD at Kotak Mahindra Asset Management.According to data from Julius Baer India, MSCI India is currently around 22 times price to earnings, while the MSCI EM is trading at 14.3 times.

Shah said in the near term, rich valuations could keep some foreign investors on the sidelines, while some may await clarity on the tariffs before deploying funds. He said active funds have been active in the IPO market though."Since the dollar is likely to soften further, the outflows from the US are expected to be allocated to emerging markets, but it's difficult to predict when the turnaround will happen," he said.The US dollar Index, which ended marginally higher post the Fed outcome on Wednesday night, has dropped 0.7% so far this week to 96.9.

The Fed cut interest rates by 25 basis points for the first time since December and signalled two more rate cuts in 2025.The silver lining is that India's valuation premium over other EMs has declined over the past few months and is near long-term average levels in the wake of the recent market weakness.Investment advisors expect the foreign outflows to run their course soon."FPI pessimism is currently at record high levels, and the return of earnings momentum along with the resumption of trade talks with the US should improve the FPI sentiment for Indian equities," said Unmesh Kulkarni, managing director, Senior Advisor, Julius Baer India.Shah said flows by domestic institutions like mutual funds, pension funds and insurers could be the turnaround factor."If DIIs can induce fear of missing out among foreign counterparts, their selling can turn into buying," he said.Domestic investors have pumped in around ₹5.46 lakh crore in 2025.

Source: Kitco