Foreign investors are fleeing India's stock market — but analysts see long-term potential

Indian equities have been sliding since September, as foreign investors spooked by a slowdown in the country's economy exit their holdings. Analysts see this as a "healthy correction."

India's benchmark stock indexes the Nifty 50 and Sensex are hovering at more than seven-month lows, firmly in correction territory since their September high.

Sectors such as real estate, energy and autos have been the biggest decliners, data from Goldman Sachs showed. 

This development comes as a stark reversal from last year, when the Nifty 50 consistently notched record highs, and outperformed the S&P 500 for the greater part of the year.

"The bubble was long building, but acknowledgement is recent," said Venugopal Garre, head of India research at AB Bernstein. He attributed the gloomy outlook to a mix of sluggish earnings and weak economic growth in India's second fiscal quarter.

India's gross domestic product expanded by 5.4% in the quarter ended September, marking the slowest growth rate in the past seven quarters. The government recently lowered its economic growth estimates for the fiscal year ending March to 6.4% — the lowest in four years. 

"After a stellar run, India's economy has entered a softer patch that will continue for a few more quarters," data and analytics firm Capital Economics said in a recent note.

"We think that will portend an underperformance in local equities relative to other major benchmarks," wrote Harry Chambers, assistant economist at Capital Economics.

HSBC earlier this month downgraded its rating on Indian equities to "neutral" from "overweight." The bank also cut its Nifty 50 earnings growth forecast for fiscal year 2025 to 5% from 15%.

Foreigners have been net average sellers of Indian equities over the last