Prof D Mukherjee
As of March 12, 2025, the BSE Sensex stands at 73,858.67, reflecting subdued equity market performance. Analysts warn of risks demanding regulatory attention. The Economic Survey 2025 highlights the possibility of a sharp US market correction due to inflated valuations and investor optimism. A downturn could impact Indian markets, particularly as young, inexperienced retail investors increasingly drive participation. According to the SPIVA India Scorecard 2023, 52% of Indian Equity Large-Cap fundslagged behind the S&P BSE 100, questioning the efficacy of active fund management. Additionally, India’s price-to-earnings (P/E) ratio has dipped below the Dow Jones Industrial Average for the first time since 2009, indicating shifting investor sentiment and capital outflows. This trend underscores concerns over reverse equity flows from India. A comparative analysis with economies like the USA, China, Japan, South Korea, Singapore, and EU nations provides context for India’s standing in global markets. To strengthen the Sensex and improve the P/E ratio, regulators must enhance oversight and introduce resilience measures to mitigate external shocks
Reverse equity flows indicate net Foreign Portfolio Investment (FPI) outflows from a country’s stock market. Recently, India has witnessed substantial FPI withdrawals, with investors pulling out nearly Rs 992 billion ($12 billion) since January 2025. A key reason for this shift is the redirection of funds to alternative markets, particularly China. This movement has pressured the Sensex downward and lowered India’s price-to-earnings (P/E) ratio.As of June 30, 2024, India’s trailing P/E ratio stood at 22.32, surpassing many global economies. The U.S., with its well-established market and strong corporate earnings, recorded a P/E of 23.97. Canada, supported by economic stability and resource exports, stood at 17.36. The U.K. and France, grappling with inflation and uncertainty, had lower ratios of 14.46 and 13.14, respectively. Germany, Europe’s largest economy, maintained a cautious 14.06 amid industrial slowdowns. Despite its market size, China’s 13.46 reflected regulatory concerns. Japan’s industrial growth and corporate reforms resulted in a 17.52 P/E, while Australia, driven by commodities, stood at 13.25.Historically, Indian equities have commanded a valuation premium. However, the recent dip in India’s P/E ratio below the Dow Jones level suggests relative undervaluation. This shift could enhance the appeal of Indian markets to investors. To sustain confidence and attract capital, strategic market reforms remain crucial.
While searching the factors contributing to the reversal of equity flows from India many factors came to surface. For instance, Indian equities have been trading at elevated valuations, making them less attractive to investors looking for value. As of January 2024, the MSCI India Index traded at a 157% premium over the MSCI China Index based on forward earnings estimates, nearing a record high. This significant premium has prompted global investors to consider alternative markets offering more reasonable valuations. With other emerging markets providing similar or better growth potential at lower price points, capital has shifted toward undervalued opportunities, impacting foreign inflows into Indian equities.Further, the U.S. Federal Reserve’s monetary policy tightening has led to capital outflows from emerging markets, including India. With U.S. interest rates rising to combat inflation, American treasury yields have become increasingly attractive to investors seeking safer, high-return assets. This shift has resulted in a reallocation of global capital, as higher bond yields in the U.S. diminish the relative attractiveness of equities in developing markets. Additionally, higher borrowing costs have impacted Indian businesses, slowing investment and profitability, thereby reducing investor appetite for Indian stocks.
Moreover, concerns regarding corporate governance in India have influenced investor sentiment. Allegations against major Indian conglomerates, such as the Adani Group, have raised questions about transparency, regulatory oversight, and governance practices. Such issues create uncertainty, leading to increased scrutiny from Foreign Institutional Investors (FIIs). Global investors, who prioritize strong corporate governance and risk mitigation, may shift their investments toward markets where regulatory frameworks are perceived as more robust. Addressing these concerns through stringent regulatory reforms and enhanced corporate accountability is essential to rebuilding investor trust.Additionally, a slowdown in economic growth has added to investor apprehensions regarding Indian equities. Indicators such as declining consumer demand, reduced corporate earnings growth, and sluggish industrial production have signalled potential headwinds for the Indian economy. Weak performance in key sectors, including real estate and consumer goods, has further exacerbated concerns. While India’s long-term growth prospects remain strong, near-term uncertainties have prompted investors to reallocate capital to markets with stronger short-term growth dynamics. Implementing policies that boost domestic demand and enhance productivity will be critical in reversing this trend.
Several strategies are urgently called for formulation and implementation in no time in order to counteract reverse equity flows and enhance market valuations, for instance, strengthening corporate governance is essential to restore investor confidence in the Indian equity markets. Regulatory bodies such as SEBI should enforce stricter compliance measures, ensuring greater transparency and accountability from publicly traded companies. Requiring enhanced financial disclosures, independent auditing, and stricter penalties for corporate fraud can mitigate risks of malpractices that deter foreign investors. Additionally, fostering an environment where whistleblower protection laws are actively enforced can help expose unethical practices. By aligning corporate governance norms with global best practices followed in the U.S., Japan, and the EU, India can make its equity market more attractive to institutional investors. A transparent and accountable business environment fosters investor trust, ultimately contributing to higher stock valuations and a revived P/E ratio.
Secondly, a well-coordinated combination of monetary and fiscal stimulus can reinvigorate economic growth, thus positively impacting corporate earnings and stock market performance. The Reserve Bank of India (RBI) can consider calibrated interest rate cuts to improve liquidity and borrowing conditions, making capital cheaper for businesses and consumers alike. On the fiscal side, government spending on infrastructure, technology, and green energy projects can stimulate economic activity, creating multiplier effects across sectors. Targeted tax relief for businesses, particularly in high-growth industries such as digital services and manufacturing, can drive investment and productivity. Additionally, direct support for MSMEs (Micro, Small & Medium Enterprises) will ensure sustained job creation and economic resilience. Such strategic policy measures can instil investor confidence in India’s long-term growth prospects, countering capital outflows and strengthening market valuations.
Further, ensuring a stable flow of long-term foreign investment is critical to mitigating short-term volatility in Indian equity markets. Sovereign wealth funds, pension funds, and endowment funds, which typically have extended investment horizons, should be actively encouraged to participate in the Indian market. This can be achieved by providing regulatory clarity, offering tax incentives, and simplifying bureaucratic procedures for foreign institutional investors (FIIs). Additionally, promoting investor-friendly reforms such as enhanced dispute resolution mechanisms and stronger intellectual property protections can further cement India’s position as a preferred investment destination. India should also explore bilateral agreements with developed economies to facilitate cross-border investments and strengthen capital market integration. A consistent, transparent, and predictable investment climate will reduce uncertainty, ensuring a more stable and upward-trending P/E ratio.
Additionally, while foreign capital is vital, boosting domestic investor participation can provide stability and counteract external volatilities. Encouraging retail and institutional investors to deepen their engagement in the stock market can be facilitated through enhanced financial literacy programs, incentivized tax-saving investment schemes, and strengthened mutual fund penetration. Additionally, expanding systematic investment plans (SIPs) and increasing the reach of index-based funds can make stock market investments more accessible to retail investors. Strengthening pension fund investments in equities and allowing greater participation of insurance companies in the stock market can also channel long-term domestic capital into equity markets. Furthermore, digital infrastructure improvements, including seamless stock trading through fintech platforms, will empower a broader base of investors. Increased domestic participation serves as a buffer against volatile foreign capital outflows, supporting market stability and valuations.
Moreover, reducing reliance on a handful of industries by promoting sectoral diversification is crucial for sustainable economic expansion. While IT and financial services have traditionally been strong contributors to India’s market growth, emerging sectors such as renewable energy, biotechnology, artificial intelligence, and semiconductor manufacturing should be prioritized. By fostering a conducive business environment through incentives, research grants, and regulatory ease, India can enhance the competitiveness of these sectors on the global stage. Encouraging Foreign Direct Investment (FDI) in high-growth areas and supporting start-ups through venture capital funding can further accelerate diversification. Additionally, boosting agricultural modernization and exports can provide an additional growth avenue. A balanced, multi-sectoral economy is more resilient to downturns, thereby supporting consistent corporate earnings and maintaining an attractive P/E ratio for investors. Each of these strategies, when implemented effectively, can play a pivotal role in reversing the trend of capital outflows, stabilizing the market, and driving up the Sensex toward sustained growth.
The recent decline in India’s P/E ratio below that of the Dow Jones underscores the need for strategic interventions to attract and retain investment. By addressing corporate governance issues, implementing supportive monetary and fiscal policies, and encouraging both foreign and domestic investments, India can enhance its market valuations and propel the Sensex to new heights. Learning from global peers and tailoring strategies to India’s unique economic landscape will be crucial in this endeavour.
(The author is an Educationist, a Management Scientist and an Independent Researcher)
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