Foreign Capital Reprices The India Premium

Zerodha cofounder Nithin Kamath didn’t mince words when he said foreign investor interest in India has “pretty much died out.” This comment, coming just a few days ago, definitely sparked a discussion. But even before Kamath spelt it out, many reports had already indicated this.

Foreign investors have experienced no returns in Indian stocks for four and a half years, DSP Mutual Fund’s Netra report flagged recently. 

Foreign institutional investors (FIIs) have offloaded domestic equities worth ₹48,210 Cr in April so far, extending their selling trend in the Indian markets. They have sold shares worth ₹1,79,335 Cr on a year-to-date basis.

As India Inc closes Q4 FY26 and enters into the earnings season, it finds itself at the intersection of two forces. One is cyclical and familiar: global liquidity tightening, rising US yields, and geopolitical risk. The other is more structural and harder to reverse, a reassessment of India’s valuation premium and its ability to deliver earnings at the pace investors once assumed.

Between September 2024 and November 2025, foreign portfolio investors (FPIs) pulled out nearly $28 Bn from Indian equities, pushing foreign ownership to a 14-year low. India has also slipped to being the second-largest underweight position in emerging market portfolios, Tanvi Kanchan, associate director at Anand Rathi Share & Stock Brokers Limited, told Inc42.

Part of the recent outflow cycle fits the textbook playbook. Elevated US bond yields made risk-free dollar returns attractive, pulling capital away from emerging markets. The West Asia conflict in early 2026 triggered a geopolitical risk-off phase, accelerating exits across the board. These are cyclical factors, and by themselves, they do not alter long-term allocations.

But as Tarun Singh, MD of Highbrow Securities, pointed out, earlier FIIs treated it as a ‘must-own’ growth story no matter the price. Now they’re saying it’s expensive compared to other places like Japan, Taiwan or Korea.

This shift is visible in the data. In 2025 alone, FPIs sold nearly $18.9 Bn worth of Indian equities, driven by repeated earnings downgrades and concerns around the pace of recovery. At the same time, India’s weighting in the MSCI Emerging Markets Index slipped from second to fourth, now behind China, Taiwan, and South Korea. That decline is not just symbolic; it triggers passive outflows, mechanically reducing allocations regardless of India’s fundamentals.

Kanchan added that the structural concern is not that India is a bad market, but that it is an expensive market that has not delivered the earnings growth to justify its premium.

Valuations: From Hype To Reality Check

The correction underway is not dramatic, but it is meaningful. The Nifty 50 now trades at around 20X earnings, still above the emerging market average but no longer at the extremes seen in 2023-24. Over a longer period, India traded at a premium of as much as 73% to emerging markets. That premium has now compressed to roughly 27%.

The underlying structural story — demographics, digital infrastructure, and manufacturing ambition — remains intact. What was overextended was the price investors were willing to pay for that story at a time when earnings growth was underwhelming. 

This is the crux of the reset. India is not mispriced in an absolute sense, nor is it overhyped structurally. It is simply being repriced to align with what it has delivered so far.

What Will Bring Foreign Capital Back?

If the outflows were driven by a mix of macro and structural concerns, the recovery will depend on a similar alignment of triggers.

Currency stability sits at the centre of this equation. The rupee has depreciated significantly against the dollar over the past year, and for foreign investors, this directly impacts returns. According to Kanchan, currency erosion can convert a positive equity return into a negative dollar return. A stabilisation in the INR/USD pairing, potentially aided by progress on an India-US trade agreement, could quickly improve the investment case.

Earnings, however, remain the most credible catalyst. A strong Q4 FY26 performance, particularly from banking, capital goods, and domestic consumption sectors, could reset expectations around growth. 

Oil prices are the third critical variable. The West Asia conflict pushed crude higher, amplifying concerns around inflation, the current account deficit, and currency stability. A decline in crude prices below $85 per barrel would ease all three pressures simultaneously, restoring macro comfort for global investors.

Policy also has a role to play, even if it is not the primary driver. India’s long and short-term capital gain (LTCG/STCG) framework and rising securities transaction tax add to the cost of investing. While these may not dictate long-term allocation decisions, they matter at the margin. 

“Fixing or simplifying these taxes is probably the quickest and easiest thing the government can do to bring money back… it would send a strong positive signal,” Singh said.

Hence, the path to renewed inflows does not require a structural overhaul. It requires clarity on currency, earnings, and macro stability.

After The Q4 Reality Check 

Heading into Q4 FY26 earnings season, the flow picture reflects a market that hasn’t lost interest but has clearly lost conviction. 

March 2026 saw FPIs pull out over ₹52,000 Cr in just the first fortnight, remaining net sellers through every trading day. Yet, that sharp selloff came immediately after February’s strong reversal, when inflows touched ₹22,615 Cr, the highest in 17 months. The contrast isn’t contradictory; it highlights how reactive foreign capital has become to macro signals, rather than being anchored to a firm directional view on India.

Singh interprets this as a phase of stabilisation rather than recovery. In his view, while the intensity of selling should ease, a big sudden comeback is unlikely in the near term, given elevated oil prices and ongoing geopolitical tensions. That sets the context for FY27: flows may stop worsening, but they are unlikely to turn decisively positive without fresh triggers.

Those triggers are tied to earnings. With valuations having corrected but still at a premium to emerging markets, the burden has shifted to corporate performance. A strong Q4 FY26, particularly from banks, capital goods, and domestic consumption, would be the most credible way to rebuild foreign investor confidence, according to analysts. Another soft earnings print, on the other hand, would reinforce concerns around the pace of India’s earnings recovery.

Even within this cautious setup, FPIs are not exiting India altogether. What’s changed is their approach. Allocations are becoming far more selective, going towards stocks with earnings visibility and domestic demand strength. Telecom is one such sector, while capital goods and infrastructure will benefit from the new capex cycles. BFSI and energy-linked sectors are also attracting targeted interest, possibly because of investors going long on these after the long-term impact of the geopolitical conflicts subsides. 

According to Kanchan, the pattern is clear: foreign investors are gravitating towards “predictable earnings and limited global exposure,” while avoiding areas like IT and consumption where visibility remains weaker.

Beyond flows, the broader setup for India Inc remains constructive. Corporate balance sheets are stronger than in previous cycles, leverage is lower, and capital allocation discipline has improved meaningfully. The capex push across infrastructure, manufacturing, and energy has already built productive capacity that should support earnings over the medium term, benefitting new-age stocks such as Ola Electric, Ather Energy, SEDEMAC and others. 

Macro conditions are also turning incrementally supportive. The RBI’s shift to an accommodative stance, with rates easing towards 6%, is expected to support credit growth and consumption, particularly in the latter half of FY27. At the same time, steady domestic inflows. especially through SIPs, continue to provide a structural demand base, reducing the market’s reliance on foreign capital.

Nevertheless, by most estimates, revenue recovery is unlikely to happen uniformly in this fiscal. Earnings growth will be led disproportionately by capex-linked sectors such as industrials, capital goods, and power, while consumption and IT may lag. 

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[Edited by Nikhil Subramaniam]

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