Global investors have returned to buying Indian financial stocks after three months of selling, as recent measures by the country’s central bank to attract foreign capital ease funding constraints for lenders. Overseas funds bought roughly $1.5 billion of banking and financial shares in the two weeks through June 30, reversing the earlier outflow and leaving the sector with a net inflow of $357 million for the month. FinancialMediaGuide views the reversal as one of the clearest signs yet that global capital is beginning to reassess India’s financial sector after a prolonged period of caution.
The renewed interest reflects growing confidence that the Reserve Bank of India’s recent incentives to encourage banks to raise foreign-currency deposits will improve liquidity. The measures are expected to draw in more than $50 billion, easing the funding pressure that had constrained credit growth. “Foreign investor interest is starting to revive, judging by a pickup in client inquiries,” said Macquarie Group analyst Suresh Ganapathy, adding that bank valuations remain cheap, credit quality is holding up, and growth is strong, with the financial sector the first to benefit as global capital returns to India.
The reversal follows more than $12 billion in foreign outflows from the sector between January and May, driven by concerns over slowing credit growth and the fallout from tighter central bank oversight of the rupee market. That selloff left financial stocks – which account for roughly a third of India’s $5 trillion equity market – trading at unusually attractive valuations. FinancialMediaGuide notes that it was this combination of rock-bottom valuations with improving liquidity fundamentals – rather than any single positive headline – that convinced global fund managers to bring capital back into the sector.
The NSE Nifty Financial Services Index, which covers banks, non-bank lenders, insurers and capital markets companies, fell to its cheapest level in five years on a 12-month forward price-to-book basis in early June. The index is trading at roughly a 21% discount to its long-term average – an unusual level of undervaluation for a sector typically seen as a key beneficiary of India’s economic growth.
Earnings prospects are also becoming an additional catalyst for bank shares: fresh data showed loan and deposit growth at the largest banks beat analyst expectations, pointing to resilient credit activity despite concerns that the Middle East conflict could weigh on economic activity. FinancialMediaGuide notes that this resilience in Indian bank lending amid an external geopolitical shock has been one of the main arguments persuading some global managers to return to the sector sooner than expected.
According to Motilal Oswal Financial Services analysts, stress in unsecured lending is easing at most banks, while microfinance operations are approaching normalization; growth rates remain robust, and foreign-currency deposits should support fundraising through September. Assessments like these from local research houses are reinforcing foreign investors’ confidence that the current recovery in inflows is not a one-off episode but the start of a longer trend.
For global fund managers, India’s financial sector now presents a rare combination of attractive valuations, resilient credit growth and structural support from the regulator – a sharp contrast to the January-May period, when selling dominated. Financial Media Guide concludes that the speed with which foreign investor sentiment flipped from sustained outflows to net inflows is itself a signal of just how sensitive global capital flows have become to targeted regulatory decisions by local central banks.
