Foreign portfolio investors have executed a dramatic reversal in their stance toward Indian equities, with sales exceeding ₹3.6 lakh crore ($45 billion) since October 2024. According to veteran investor Akash Prakash, this sustained selling represents a fundamental shift from years of outperformance to relative underperformance. The intensity has been particularly pronounced, with multiple instances in recent weeks where daily outflows have crossed ₹8,250 crore ($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 selling 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 overall market sentiment.
Valuations remain a key concern driving the foreign investor exodus. 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. The premium has become particularly challenging as global investors seek better value propositions across emerging markets.
Several key sectors are facing significant growth challenges that are contributing to the foreign investor retreat. IT services continue to grapple with uncertainties linked to AI disruption, while private sector banks are dealing with intensified competition from public sector lenders. Consumer staples are seen as having peaked earnings, and global generics are transitioning towards more complex biosimilar opportunities, limiting near-term visibility. These sectoral headwinds are compounding the overall market sentiment challenges.
Despite the current weakness in foreign investor sentiment, the 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. However, the current selling wave has been so substantial that even resilient domestic institutional flows have been insufficient to offset the broader shift in global capital allocation.
