Many investors believe India's booming economy will continue to drive stocks higher.

India's stock market has boomed on the back of billions of dollars of international money inflows and a rapidly growing pool of small investors.

The MSCI India index is up more than 7 percent this year, driven by gains in the shares of banks and automakers. By contrast, the MSCI China index is down nearly 11 per cent and a broader emerging markets index is down 2 per cent.

Foreign investors poured $8.3bn into Indian equity funds between January and August, the highest on record for the same period, according to data provider EPFR. These investors began to reduce their exposure to Indian equities in September, but the country still attracted more foreign investment than the rest of Asia in the third quarter, according to Goldman Sachs.

Prerna Garg, equity strategist at HSBC, said: "Investors have cut their exposure to Chinese equities, reduced a lot of their positions to underweight and moved into India. Foreign interest in India has largely contributed to the boom in the Indian stock market."

Indian stocks have outperformed their Chinese counterparts over the past three years, in part because China's economy has yet to fully recover from the trauma of the country's strict coronavirus containment policies. But until this year, the performance of Indian stocks in attracting foreign investment has been patchy. Foreign institutional investors reduced their exposure to Indian equities by about $17bn last year, according to data compiled by Goldman Sachs. By the end of September, these investors had bought more than $15 billion.

Some investors think Indian stocks have risen too fast this year. At the end of August, the MSCI India index was trading at about 20 times forward earnings, compared with less than 10 times for the MSCI China index and about 12 times for the emerging markets index. This suggests that the Indian stock market is overvalued.

"These valuations have to be looked at from a long-term perspective," said Kristy Fong, senior investment director at Abrdn. 'Given the recent rally, a temporary drop in Indian companies' share prices would be a good thing,' she said.
But investors and analysts believe India's booming economy will continue to drive the stock market higher, despite the inevitable occasional twists and turns.

In the fiscal year that ended March 31, India's economy expanded at an annualized rate of 7.2 percent, making it one of the world's fastest growing major economies. The World Bank recently forecast that India's economy could grow by 6.3 per cent this fiscal year. According to the World Bank, China's economic growth will slow to 4.4% in 2024.

The focus on the economy means investors favor companies that are primarily geared toward the domestic market, especially those that could benefit from increased consumption. Shares of Indian automaker Tata Motors have surged 60% this year, while those of motorcycle company Bajaj Auto have surged 39%.

Shekhar Sambhshivan, an equity fund manager at Invesco, says investors should see India's potential in China's rapid growth over the past two decades. The International Monetary Fund estimates India's per capita gross domestic product at about $2,600, about the same level as China in 2007. China's GDP per capita is currently around $13,700.

India's stock market has also been boosted by growing interest from retail investors, who have rushed into the market following a bull run since the start of 2020. In China, retail investors have become more nervous this year, with many staying away from the stock market.

Indian stocks account for about 14 per cent of the MSCI Emerging Markets index, but according to data compiled by Pictet Asset Management, Foreign ownership of Indian stocks has been below that level for the past two years.

The Indian rupee has been more stable against the dollar this year than many other Asian currencies. Other Asian currencies have been hit hard by rising U.S. Treasury yields and expectations that the U.S. Federal Reserve will continue to raise interest rates. Nomura attributes this in part to the rupee's poor performance last year, when it lost more than 10% of its value against the dollar, though the central bank has also stepped in to support the currency.