Foreign investors continued their selling spree in Indian financials during the first half of May, withdrawing ₹17,960 crore from the sector. According to The Economic Times, this represents nearly 47% of the overall foreign outflows during the period, highlighting the sector's vulnerability to international investor sentiment. The total foreign outflows across 19 sectors reached ₹38,443 crore during the same period, as reported by NSDL data. The Economic Times reports that between January and April, overseas investors dumped more than ₹91,000 crore worth of financials, making it the sector with the highest foreign ownership in India.
The banking sector faces multiple headwinds that are driving foreign investor concerns. As reported by ICICI Securities, banks are experiencing pressure from higher bond yields, which could significantly impact treasury income. Additionally, the implementation of Expected Credit Loss (ECL) norms is expected to keep return ratios volatile in the near term, requiring higher provisioning that impacts profitability metrics. Pankaj Pandey, head of retail research at ICICI Securities, noted that banks are facing headwinds from higher bond yields, which could impact treasury income, while implementation of ECL norms requiring higher provisioning is expected to keep return ratios volatile in the near term. The Bank Nifty has fallen nearly 7% over the past month, compared with a 4% decline in the benchmark Nifty.
According to BofA Global Research, foreign selling in Indian equities may stretch into next year as Asia's artificial-intelligence winners offer stronger earnings prospects at cheaper valuations. Global investors are unlikely to return to India before 2027 or perhaps even 2028, as reported by Bloomberg. Siddarth Bhamre, head of research at Asit C Mehta Intermediates, explained that foreign outflows in the sector are due to investors wanting to cut exposure to India as a whole, as they find better bets in the rest of the emerging markets. They cannot reduce weightage in India without selling banking stocks. India is facing earnings downgrades while other AI-driven markets are seeing upgrades, with local stocks among the worst performers globally in 2026. The record $23 billion foreign selloff has been worsened by a weakening rupee, as global investors continue to chase AI-linked plays elsewhere in Asia.
Despite this year's 9% drop, the Nifty 50 gauge continues to trade at around 18 times its one-year forward earnings, which remains expensive compared to regional peers. This compares unfavorably with Korea's benchmark trading at 7.5 times forward earnings - the world's best-performing stock market this year. BofA retained its forecast of about 8.5% earnings growth for NSE Nifty 50 Index companies in the financial year ending March 2027, with current fiscal year earnings growth estimated at around 7%. As Amish Shah from BofA noted, "So essentially, we are looking at low growth on a low base for India," while contrasting this with high earnings growth in South Korea and Taiwan.
Despite the current challenges, market experts remain cautiously optimistic about the banking sector's long-term prospects. According to Asit C Mehta Intermediates, while valuations in the banking space remain reasonable, foreign outflows are primarily due to investors wanting to reduce exposure to India as a whole. The MSCI rebalancing next week could draw some foreign inflows, though this is expected to be a one-time event rather than a sustained trend reversal. Pandey from ICICI Securities noted that the services sector, which includes Adani Group stocks such as Adani Ports and Adani Enterprises, performed well after resolving issues related to the US Securities and Exchange Commission (SEC). BofA's Shah warned that foreign flows will depend on when the West Asia conflict ends and when the AI capex cycle peaks out, with domestic money likely to continue chasing Indian mid- and small-cap stocks until then.
