Overseas investors are pouring money into India stocks all over again, indicating a strong return to the $5 trillion market after a brief pause earlier this year due to election-related uncertainty. Net foreign purchases of the stocks this quarter reached $8.5 billion, positioning inflows to be the highest since mid-2023, according to Bloomberg data, as quoted on Economic Times.

September is on track to mark the fourth consecutive month of foreign inflows into India, a strong rebound from the $1 billion outflow in the April-June quarter. Investor confidence has been bolstered by market-friendly prime minister Narendra Modi's third term, restoring bets on policy continuity.

India’s local companies are capitalizing on the expanding economy, with IPOs booming. While smaller IPOs have dominated so far this year, larger billion-dollar deals are now entering the market. India's weighting in several global indexes has now surpassed China’s, causing further positive sentiment.

The latest Fed rate cut has proved to be another tailwind for India stock and exchange-traded fund (ETF) investing. The likelihood of the falling U.S. dollar is a plus for emerging markets like India. Several India ETFs have been hovering around a 52-week high.

These ETFs include Franklin India ETF (FLIN Quick QuoteFLIN - Free Report) , India Internet & Ecommerce ETF (INQQ Quick QuoteINQQ - Free Report) , First Trust India Nifty 50 EW ETF (NFTY Quick QuoteNFTY - Free Report) , India 50 iShares ETF (INDY Quick QuoteINDY - Free Report) and India MSCI iShares ETF (INDA Quick QuoteINDA - Free Report) .

Investor Confidence Despite High Valuations

The NSE Nifty 50 Index is on track to record the ninth successive annual gain. Despite these elevated valuations, India equities remain attractive due to stronger growth prospects relative to other markets. “Despite higher valuations, Indian equities remain attractive relative to other markets where growth prospects are more subdued,” noted James Cheo, chief investment officer for Southeast Asia and India at HSBC Global Private Bank, as quoted in Economic Times.

Moreover, the CEOs of Google and Nvidia announced plans to significantly expand their AI initiatives in India. Nvidia CEO Jensen Huang indicated India’s tech talent and the country’s growing startup ecosystem are favorable for AI development.

India's Growth Prospects

The International Monetary Fund projects India to become the third-largest global economy by 2028, and Bloomberg Intelligence predicts it will lead global growth by then. India’s gross domestic product (GDP) expanded 6.7% in the most recent quarter, surpassing China’s growth of 4.7%, as quoted in Economic Times.

India Market Outdoes Broader Emerging Markets Despite Higher Valuation

The MSCI India Index has risen 7% this quarter in dollar terms, significantly outpacing the broader MSCI Emerging Markets Index, which has gained around 2%. India’s stock market is now twice as expensive as the broader emerging-market index based on forward earnings valuations, with the Nifty 50 Index trading at 21 times forward earnings, higher than its 10-year average of 18 times.

Any Cause of Worry?

With the stock market rallying, hedging costs against declines in the Nifty 50 have increased by 45% compared to the past year. Additionally, some market observers are cautious about potential populist policies, as Modi's party has announced cash handouts in some states ahead of regional elections.