Foreign investors have not only stayed away from Indian equities but have also shown caution towards the domestic debt market, with rising global bond yields significantly reducing the relative attractiveness of Indian assets. According to The Economic Times, the rupee has weakened by ₹10 against the US dollar over the past year to 94 today, a 12% fall in 12 months. The real return offered by INR bonds is not lucrative enough considering the underlying risk, as the rupee carries a higher hedging cost compared with currencies such as the euro, yen and the Chinese yuan. For instance, an average 10-year corporate bond yield of above 5% in the US and around 4% in Europe, supported by relatively strong currencies, compares unfavourably with a taxable and volatile INR offering a corporate yield of around 7.75%. The sustained rise in bond yields across major economies, including Japan, has had a negative impact on India through a reversal in yen carry trades, with Japanese investors' holdings in India declining by around 12% over the past year.
Foreign investors are reallocating capital away from India towards markets like Taiwan and South Korea that offer stronger exposure to AI and semiconductor growth. According to The Economic Times, foreign investors have been steadily pulling money out of India for months, with their ownership of NSE-listed companies falling to the lowest level in seventeen years by March 2026. During the last financial year, foreign investors sold a record amount of Indian equities, reflecting a gradual shift in where global investors see the next decade of growth. The trend highlights India's structural gaps in innovation, limited deep-tech opportunities in listed markets, and rising concerns over valuations amid moderating earnings and slowing capital inflows.
India's limited participation in the global AI rally has been a key factor behind FPI selling and the underperformance of the Indian stock market over the past year. India's weighting in the MSCI EM index dropped significantly from its peak of 20 on 31 July 2024 to 11.9 on 30 April 2026, representing an absolute decrease of 8.1 points, which equates to a 40.5% reduction from its 2024 level. In contrast, Korea's weight surged from 12.1 in July 2024 to 18.7 in April 2026, marking an absolute increase of 6.6 points, resulting in a 54.55% percentage increase. Taiwan experienced steady and substantial growth, climbing from 18.4 in July 2024 to 24.8 by April 2026, reflecting an absolute increase of 6.4 points, translating to a 34.78% percentage increase.
The bond market exodus has intensified significantly, with FII net purchases in India's debt market declining sharply from ₹1.07 lakh crore in 2024 to a net outflow of ₹19,888 crore in 2025, before turning modestly positive at ₹7,711 crore in 2026 to date. The equity market has witnessed an even sharper deterioration, with FII flows moving from a net outflow of ₹3,245 crore in 2024 to ₹1.62 lakh crore in 2025 and nearly ₹3 lakh crore in 2026 to date. As per The Economic Times, over the last 12 months, FIIs have invested more than US$100 billion in Japan while selling around US$38 billion in India, with Japanese investors' holdings in India declining by around 12% over the past year. The hawkish global central bank stance and rising interest-rate cycle have made India's bond market less attractive to foreign investors seeking superior risk-adjusted returns.
The fundamental challenge facing India is its inability to offer exposure to the world's fastest-growing sectors amid rising global competition. As noted by The Economic Times, India has every ingredient to become one of the world's largest markets, but the next challenge is becoming one of the world's most innovative markets. To reverse the current trend, India must deliver stronger corporate earnings growth and create compelling investment opportunities in areas linked to new technologies and productivity-led expansion. The persistence of a hawkish policy stance by the US Federal Reserve could delay the emergence of a supportive environment for Indian financial markets, but India's well-expected inclusion in the Bloomberg Global Aggregate Index may provide some relief by attracting incremental debt inflows. A faster decline in crude oil prices to $70 and moderation in geopolitical risks would support the domestic economy and help soften country interest rates while sustaining a healthy real return ratio.
