Driven by an optimistic economic outlook and the Federal Reserve's interest rate cuts, foreign capital has been pouring into the Indian stock market.
The benchmark index, Nifty 50, once broke through the 26,000 mark on Tuesday, reaching a new historical high.
When looking at the timeline from the beginning of the year, the Nifty 50 index has accumulated an increase of nearly 18%.
Despite the Indian election results being less than expected, the escalation of global geopolitical tensions, and the disappointment with the new government's capital gains tax proposal, the growth momentum of the Indian economy is still widely favored.
The International Monetary Fund (IMF) previously predicted that by 2028, India will become the world's third-largest economy.
At the same time, Morgan Stanley's recently released August quarterly assessment report shows that the weight of the Indian stock market in the MSCI Emerging Markets Index has jumped from 18.8% in May to 19.8%, a historical high.
Morgan Stanley stated that the increase in index weight may be a significant sign of the Indian stock market's sustained upward trend, and fundamental factors such as the improvement of listed companies' free-floating shares and the rise in relative returns may also be contributing factors.
Coupled with the Federal Reserve's substantial interest rate cuts, the enthusiasm of foreign capital reached its peak last week.
According to the latest statistics from institutions, as of last Friday, the value of Indian stock-related derivatives held by foreign institutional investors reached a record 9.7 trillion rupees (about $116 billion).
Among them, the bullish contracts of Indian index futures increased to more than 500,000, especially those related to the Nifty 50 index.
Overall, the bullish exposure of foreign capital to Indian stock market derivatives has reached the highest level since 2015.
Some analysts believe that after a period of stagnation, the Indian stock market is still expected to rise for the sixth consecutive quarter, and September may become the best month for capital inflow in the past six months.
Bloomberg data shows that the net purchase of the Indian stock market by foreign capital in this quarter has reached $8.5 billion, expected to be the highest level since mid-2023.
"These latest signs indicate that foreign investors are actively optimistic about the Indian market, and it is expected that this trend will continue for some time," said Anuj Dixit, Executive Vice President of the Equity Department of Indian investment institution Sovereign Global.
However, high valuations inevitably bring high risks, and the price-to-earnings ratio of the Indian stock market has reached twice that of the MSCI Emerging Markets Index.
According to data from Bloomberg, the current P/E ratio of the Nifty 50 is 25.5 times, and the P/E ratio for the next 12 months is 23 times.
HSBC previously stated that while the Indian stock market is currently hot, there are still ten risk factors, such as a slowdown in corporate earnings, difficulties for banks in absorbing deposits, low capital expenditure in the private sector, and weak and concentrated foreign investment.
Taking corporate earnings as an example, the attractiveness of the Indian stock market largely depends on maintaining strong earnings growth.
HSBC pointed out that the performance of Indian companies in the second quarter is worrying, with earnings growing at a double-digit rate, unlike the high-speed growth seen in previous years.
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