Record surge: India ETF flows soar in 2023, analysts expect momentum through election year

According to Morningstar Direct data, net inflows into India-focused ETFs totalled $8.6 billion in 2018, surpassing the $7.4 billion peak in net flows recorded in 2021.

In 2023, net inflows into exchange-traded funds (ETFs) that track Indian stocks reached a record high. Analysts are confident that investors will keep piling into the world’s fastest-growing major economy despite the impending highly anticipated general elections.

According to Morningstar Direct data, net inflows into India-focused ETFs totalled $8.6 billion in 2018, surpassing the $7.4 billion peak in net flows recorded in 2021.

India has become a prominent player in the ever-changing global financial markets, with Exchange-Traded Fund (ETF) flows witnessing an unparalleled upswing in 2023. The nation is expected to maintain its momentum as it prepares for general elections that are scheduled for May and beyond. This momentum is driven by a combination of political optimism, strong economic growth, and global diversification strategies.

Strong inflows into India ETFs are currently observed, which is in stark contrast to European investors’ attitude toward Taiwan, where the impending elections caused a $91.6 million withdrawal from Taiwan-linked ETFs in 2023. In India, analysts point to the lack of perceived political risk in the run-up to the elections, with Prime Minister Narendra Modi anticipated to secure a rare third term.

Tom Bailey, Head of ETF Research at HANetf, remarks, “The strong inflows suggest that investors do not see the upcoming election as a political risk.” This sentiment is underlined by the fact that Indian shares are currently at all-time highs, and foreign portfolio investors made record monthly purchases of equities in December 2023. Aspirations for political continuity have been bolstered by the Bharatiya Janata Party’s (BJP) success in removing the opposition from power in several important states.

The optimistic outlook among investors is largely attributed to India’s economic prospects. The country expects to grow at a faster rate than major global economies, with an annual growth rate of 7.3% for the fiscal year ending in March. India’s strong economic growth and geopolitical stability make it a desirable location for foreign investors looking to diversify their holdings in emerging markets.

Concerned about China’s economic expansion and the tensions between the US and China, investors are looking to India as a potential alternative. Alliance Bernstein’s Head of Emerging Markets, Sammy Suzuki, observes that “India will increasingly attract more attention as China’s growth rate slows.”

The NSE Nifty 50 index increased by 20% in 2023, demonstrating the remarkable returns offered by Indian markets. This beats the MSCI emerging markets stocks index’s 7% increase and the notable 11.4% decline in China’s blue-chip CSI300 Index. The fact that inflows into India ETFs made up a third of all investments made into emerging market funds in the previous year, as per Morningstar data, further emphasizes the appeal of India’s market.

A substantial amount of the global fund flows aimed at India in 2023 went to U.S.-listed exchange-traded funds with an emphasis on India. Two of the largest players in terms of drawing in investments were the $2 billion WisdomTree India Earnings ETF and the $7.9 billion iShares MSCI India ETF. This trend was influenced by the ease of access and convenience that exchange-traded funds (ETFs) provided, which made it easier for foreign investors to enter Indian markets than direct equity investments.

Malcolm Dorson, Head of Emerging Markets Strategy at ETF provider Global X, emphasized this point, stating, “ETFs allow for easy access to Indian markets for foreign investors compared with direct investments into equities in India, where it takes 9 months for a foreign investor to open up local accounts.”

A tailwind for Indian equities is anticipated by market observers as India enters 2024, an election year. This expectation is a result of the expectation of higher government spending as well as the assurance of continued economic policy in the years to come. Election years have historically benefited Indian equities, which is consistent with the general optimism about the country’s economic development.