Foreign investors pulled $5 billion from India-focused offshore funds and ETFs in the March quarter, marking a sharp acceleration from $1.8 billion in net outflows in the previous quarter. According to Morningstar's Offshore Fund Spy report, the asset base of India-focused offshore funds and ETFs fell 19.5% quarter-on-quarter to $77 billion from $95.7 billion, reflecting both redemptions and a 14.5% fall in the Nifty 50 during the quarter. The bulk of withdrawals came from US- and Luxembourg-domiciled Indian open-ended equity funds and ETFs, which recorded outflows of ₹18,020 crore and ₹13,400 crore respectively, while France- and Japan-based Indian equity funds also saw outflows of ₹2,794.04 crore and ₹2,569.86 crore respectively. As per Morningstar, these outflows occurred just ahead of a massive rebound in Asian equities on the first day of April, with the shift coming amid a broader global rotation toward artificial intelligence-linked markets.
The outflows reflect a broader global rotation where investors increased allocations to AI-linked opportunities, with markets such as Korea and Taiwan emerging as key beneficiaries within the emerging markets universe. Manish Bhandari, chief executive and portfolio manager at Vallum Capital, said the outflow accelerated in the last quarter due to acceleration of global capital in the AI trade, with Korea and Taiwan drawing significant foreign capital away from emerging markets like India. The prolonged trade deal uncertainty and geopolitical tensions, which weighed on oil-importing economies like India, further fuelled outflows. Despite the scale of outflows, several experts say the move does not signal a structural exit from India, with Ashwin Patni of Julius Baer India noting these flows reflected "tactical asset allocation decisions rather than a structural change in India's investment case."
Despite the record outflows, some experts see early signs of macro stabilization in India. Patni noted that sentiment has improved significantly as the West Asia ceasefire and the sharp fall in crude prices have removed a key overhang, while recent Reserve Bank of India measures are expected to boost forex inflows and support the rupee, which has already rebounded sharply. He added that India continues to stand out for its growth visibility, policy continuity, resilient domestic demand and improving corporate profitability. Investors now disagree on whether foreign sentiment has begun to recover, with Bhandari believing foreign sentiment towards India has improved as geopolitical tensions have eased, oil prices have fallen, and the central bank's FCNR deposit support has boosted confidence. However, Vivek Rajaraman of Waterfield Advisors remains cautious, stating while he believes the larger outflows are behind us, sentiment has not turned positive yet.
India remains attractively valued relative to its historical valuations, with MSCI India currently trading at 24 times earnings, below its five-year average of 25.8 times, while MSCI Emerging Markets trades at 18.8 times versus a long-term average of 14.7 times. India Inc. delivered a solid earnings rebound in the second half of FY26, with war-related disruptions expected to dampen earnings in the first half of FY27 but the drag is expected to fade in the second half. Patni said a sustained revival in inflows will likely require a combination of earnings acceleration, continued macro stability, and greater visibility on global growth and interest rate trajectories. He also noted that any moderation in AI-driven concentration of flows could redirect investor interest toward broader markets, benefiting India's structural strengths.
The Indian outflows occurred alongside record withdrawals from US-listed ETFs tracking India and Taiwan, with $1.4 billion pulled from BlackRock's $6.7 billion iShares MSCI India ETF (INDA) and $1.1 billion from the $7 billion iShares MSCI Taiwan ETF (EWT). Taiwan's energy crisis has significantly impacted its chip sector outlook, as the country remains heavily dependent on natural gas imports to run its power plants, with the country's benchmark equities index falling nearly 13% in March. Despite these challenges, some analysts remain unconvinced about India's prospects, with an Ambit Capital strategy note dated June 22 stating that expensive valuations, among the weakest growth in EM, and no AI-linked plays comparable to Korea and Taiwan make capital rotation toward these markets understandable.
