Why foreign investors are quietly pulling back from India

Foreign investors have sold over 45 billion dollars of Indian equities since Oct 2024, cutting holdings to 15-year lows as high valuations and weaker growth hurt market performance

By Vivek Iyer

(Photo Credit : FPI )

India’s equity markets are witnessing a sharp shift in foreign investor behaviour, with sustained selling by foreign portfolio investors (FPIs) marking a transition from years of outperformance to a phase of relative underperformance.

According to veteran investor Akash Prakash, FPIs have been persistent sellers in Indian equities since October 2024, with outflows exceeding $45 billion over an 18-month period. The intensity of this selling has been notable, with multiple instances in recent weeks where daily outflows have crossed $1 billion. In aggregate terms, the selling accounts for nearly 1% of India’s total market capitalisation, indicating pressure that surpasses levels seen during the global financial crisis.

The shift in flows reflects a broader change in how global investors are positioning India within emerging markets. Foreign ownership in Indian equities has dropped to a 15-year low, signalling a significant underweight stance. This comes after a prolonged phase where India outperformed other emerging markets by nearly 5,000 basis points. That trend has now reversed, with India slipping into relative underperformance of around 5%, weighing on sentiment.

Valuations remain a key concern. Despite a moderation in earnings growth, Indian equities continue to trade at a steep premium of about 50% compared to emerging market peers. This has made India less attractive in a global context, especially when markets such as Korea and Taiwan offer stronger earnings growth at lower valuations.

Another factor influencing flows is India’s limited participation in the recent global rally driven by artificial intelligence and technology themes. Several emerging markets have benefited from a re-rating linked to AI and IT, while India has not captured a similar premium. At the same time, there is a growing perception among investors that India may be structurally constrained to an earnings growth band of 10–15%, which reduces the scope for upside surprises.

At a sectoral level, large parts of the market are facing growth challenges. IT services continue to grapple with uncertainties linked to AI disruption. Private sector banks are dealing with intensified competition from public sector lenders. Consumer staples are seen as having peaked earnings, while global generics are transitioning towards more complex biosimilar opportunities, limiting near-term visibility.

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Domestic institutional flows have remained resilient and have helped absorb part of the foreign selling. However, they have not been sufficient to offset the broader shift in global capital allocation.

Even as sentiment among foreign investors remains weak, the current extreme positioning could eventually act as a contrarian signal. A recovery in earnings growth, supported by higher capital expenditure and increased research and development spending by Indian companies, could help restore investor confidence and attract flows back into the market.