India witnessed its largest fund outflows since March 2022, driven by significant redemptions from dedicated and allocation funds, according to the latest global fund flow data. India-focused funds saw net outflows of $302 million, while total outflows, including allocation funds, reached $569 million. The retreat marks a key turning point in foreign fund allocations, signaling potential long-term softness in inflows, according to an Elara Securities India report.
The shift coincides with a surge in US market inflows, where investor sentiment has turned euphoric following post-election results. US-dedicated funds attracted $110 billion over the last three weeks, with $57.6 billion recorded in the most recent week—the highest weekly inflow in the history of EPFR. Of this, $73 billion was directed toward domestic US funds, while $24 billion flowed into Ireland-domiciled funds. Canada and Japan-domiciled funds investing in the US added $2.6 billion each.
US small-cap funds have also seen strong momentum, garnering $10.7 billion in the past three weeks, reflecting growing investor confidence in the segment. These inflows largely originated from redemptions in emerging markets such as China, India, Taiwan, and South Korea, where currencies have weakened against the US dollar.
Japan fund inflows
Japan retail funds, a historically stable source of inflows for India, turned negative for the first time since January 2018. Retail flows from Japan, which accounted for $8.6 billion of inflows into India since November 2022, have now reversed. Institutional flows from Japan, which contributed $2.1 billion during the same period, also remain subdued. In contrast, Japanese yen flows into the US market remain robust, underscoring a shift in preference.
While the global investment landscape has yet to experience a breakdown in risk appetite, the momentum in emerging market equity flows is softening. High-risk assets, such as junk bonds, continue to see strong inflows, but recovery in emerging market bonds and commodities remains lackluster over the past year.
The data suggests that a major cycle of foreign fund allocations into India may have concluded, pointing to a prolonged period of softer trends for the Indian market.
