Axis Capital Eyes Rs 6.6 Lakh Crore PSU Divestments to Relieve Foreign Outflows

Accelerating government divestments could expand India's investable equity pool, ease valuation pressures and limit ongoing foreign capital outflows, according to an analysis by Axis Capital. Prateek Ancha, Chief Economist at Axis Capital, outlined in a report titled Strong divestments can support capital flows and fiscal aims that a sustained state stake-sale programme could deepen market free float and generate substantial fiscal receipts as sovereign financial pressures build.

The brokerage calculated that a 15% reduction in government ownership over the next three years could raise approximately Rs 6.6 lakh crore. State holdings in listed companies have climbed to Rs 44 lakh crore, roughly four times pre-pandemic levels, with significant concentration in banking and financial institutions. Accelerated divestment could address the underlying demand-supply plumbing problem of excess equity demand by expanding investable supply and containing valuations in mid-cap and small-cap segments.

Foreign institutional investors net sold Indian equities worth nearly Rs 14,475 crore in September, driven by expensive valuations and prolonged earnings disappointment, according to National Securities Depository Limited data cited by analysts. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, noted that foreign outflows coincided with escalating Middle East tensions, surging oil prices above $108 per barrel for Brent crude, and rising global bond yields.

The benchmark 10-year US Treasury yield climbed toward a three-year high of over 4.9%, while domestic 10-year bond yields surpassed 7%. Analysts warned that if US yields reach 5%, global equity markets could face sharp corrections as investors shift capital toward higher-yielding sovereign debt. Conversely, Yes Securities offered a contrarian view, arguing that a 5% Treasury yield reflects stronger nominal growth and higher equilibrium rates rather than economic distress, provided corporate earnings continue to expand.

Despite heavy foreign selling in the secondary market, foreign portfolio investors have maintained capital allocation toward Indian primary markets. Early September data indicated FPI primary market investments stood at Rs 1,336 crore, bringing total primary deployment for the year to Rs 47,183 crore. Analysts attribute this dichotomy to strong domestic institutional inflows absorbing secondary market sales at high valuations while primary issuances capture robust investor appetite.

The government has already achieved 70% of its fiscal year divestment target during the first five months, largely through offerings such as Life Insurance Corporation stake sales, with additional transactions like IDBI Bank slated for the pipeline. Axis Capital emphasized that these stake sales provide a dual mechanism to support both equity market balance and sovereign fiscal consolidation.

Fiscal pressures are mounting as income-tax collections face shortfalls alongside rising subsidy expenditures. Axis Capital estimated that if income-tax growth registers at 12% rather than the implied 18%, it would generate a shortfall of Rs 76,200 crore. Furthermore, fiscal strains are projected to persist into fiscal year 2028 with the implementation of the 8th Pay Commission.

While state divestment offers a more durable financing solution than expenditure compression, market analysts remain divided on broader macro implications. While some brokerages warn that rising debt service costs and energy shocks could trigger broader capital flights from emerging markets, domestic liquidity buffers continue to cushion structural market valuations against external volatility.