FM Sitharaman Warns of Market Weakness Due to Excess Liquidity
Finance Minister Nirmala Sitharaman highlights the impact of excess liquidity on Indian equity performance during IMF-World Bank meetings.
Indian stock indexes have dropped nearly 12% since January 2023.
Foreign portfolio investors have sold over $33 billion in Indian equities this year.
Equity mutual funds saw record inflows of Rs 38,307 crore in September 2023.
During an exclusive interview at the IMF-World Bank meetings in Bangkok, Finance Minister Nirmala Sitharaman expressed concerns over the recent underperformance of Indian equities, attributing it to excess liquidity in the market. She noted that the ease of liquidity has allowed investors to exit their positions more freely, which could continue to affect market performance negatively. Despite these challenges, she reassured that the fundamentals of the Indian economy remain strong.
The Indian stock market has faced significant challenges, with benchmark indexes falling nearly 12% since the beginning of the year. This decline has been driven by trade uncertainties and geopolitical tensions. Sitharaman highlighted sustained capital outflows as a major risk for the Indian economy, particularly in 2027. The markets have shown zero returns over the past two years, raising concerns among investors.
Data from the National Securities Depository Limited (NSDL) reveals that foreign portfolio investors have divested more than $33 billion from Indian equities in 2023. This trend has raised alarms, especially as India appears to be missing out on the artificial intelligence investment boom, with countries like Taiwan and South Korea attracting significant foreign capital. Sitharaman acknowledged this flight of capital towards AI and the US as a pressing concern.
Despite these challenges, Sitharaman suggested that India might be somewhat insulated from a broader market correction that could arise from a downturn in AI investments, given its limited exposure to AI-related assets. She emphasized that India is actively enhancing its semiconductor manufacturing capabilities and is no longer lagging in advanced technologies. On October 16, foreign investors returned as net buyers of Indian equities after a prolonged selling streak, purchasing shares worth approximately Rs 1,166 crore.
Looking ahead, Sitharaman called for a strategic blend of public investment, robust municipal finances, development finance, and private capital to foster financially sustainable cities that can attract investments. Speaking at the World Bank-IMF Annual Meetings, she underscored the importance of integrating these funding sources to develop cities that are both viable and appealing to investors, ensuring long-term financial sustainability.
