The cure for high prices is high prices

In my last post, I wrote about how high valuations led to record promoter sales in India. That, combined with rupee depreciation and stagnant markets, triggered huge foreign portfolio investor exits. Which in turn put further pressure on the rupee.

But there's a less obvious consequence of current valuations. India's net FDI, what's left of inbound investment after foreign companies pull money back out and Indian companies invest abroad, has collapsed. While gross FDI remains steady near post-pandemic highs, net FDI in FY25 has declined 99% from the 10-year median of $31bn. The current fiscal year looks better, but not by much. A big reason? Multinational companies taking advantage of high valuations here to list their Indian subsidiaries and repatriating the proceeds.

Take Suzuki. The parent company's market cap on the Tokyo stock exchange is ~$28bn. The value of its 58% stake in Maruti Suzuki India? ~$31bn. The subsidiary stake alone is worth more than the entire company. There are many other examples like this.

At prices like this, who can blame promoters for cashing in? Hyundai India's IPO tells the story clearly. It raised ~$3.3bn in late 2024 — entirely an offer for sale, meaning none of that money stayed in the company. Some of it went to funding a share buyback at home in Korea, its largest ever. Before the IPO, Hyundai India had also ramped up dividend payouts — ~$0.2bn in FY22, ~$0.6bn in FY23, ~$1.3bn in FY24. All disclosed transparently in the IPO documents. The result? Oversubscribed more than 2x, led by Indian financial institutions deploying retail investor wealth.

This creates a self-reinforcing cycle. Capital leaves India. The rupee weakens. USD returns from India erode further. More investors exit. The currency falls again. It will likely persist until valuations normalise.The cure for high prices will, yet again, be high prices.