FPI gloom at its worst, but market veterans see better returns ahead

The scale of the loss of foreign investor confidence is hard to ignore. Since the market peaked in September 2024, foreign portfolio investors have pulled out an estimated $65 billion from Indian equities. India's weight in the MSCI Emerging Markets index has fallen from around 21% to about 10%, while the stock of Indian equities held by foreign investors has declined from $930 billion to $675 billion, said Akash Prakash of Amansa Capital in a recent Business Standard column titled Risk of irrelevance?, which became the talk of the town in Mumbai market circles.

The piece highlighted the extent of India's relative decline: Indian equities have underperformed emerging-market indices by about 7,500 basis points, or 75 percentage points, since September 2024, while the underperformance over the past decade has averaged around 180 basis points annually. Based in Singapore, Prakash founded Amansa Capital in 2006. The firm runs a concentrated, India-focused long-only equity strategy.

Before setting up Amansa, he spent six years in the 1990s as an executive director and portfolio manager at Morgan Stanley Asset Management, where he managed the Morgan Stanley Growth Fund. He subsequently worked at the Government of Singapore Investment Corporation (GIC) and Temasek Holdings. His perspective carries particular weight given his nearly three decades of experience as a global investor in Indian equities.

Not just Prakash; others agree that foreign investor sentiment is at an extreme low. Ridham Desai, managing director of Morgan Stanley India, acknowledged the severity of the backlash. “The FPI sentiment towards India is probably negative. I should say, it's probably never been as bad as it is today,” he said at the News18 Rising Bharat Summit in Mumbai. Yet the veterans argue that this sharp loss of relative standing needs to be understood in context.

It reflects not just a deterioration in India's prospects, but also the unwinding of excessive valuations, a relative earnings advantage shifting towards other markets and a temporary squeeze on India's external balances. Why India lost favour The first reason was the high starting valuation. At the market peak in 2024, Indian equities traded at roughly twice the valuation multiples of emerging markets.

That premium left little room for disappointment. As earnings growth moderated and other emerging markets began to outperform, the valuation gap became increasingly difficult to justify. Prashant Jain, founder and chief investment officer of 3P Investment Managers, believes the correction was necessary. “India’s premiums over emerging markets have been 2x at times. This correction over the past two years had to happen,” he said at the summit.

The second pressure came from an unusual combination of balance-of-payments headwinds. This year India has faced four pressures simultaneously: sharply elevated gold imports, near-zero net foreign direct investment inflows, heavy FPI selling and a surge in crude oil prices following the escalation of geopolitical tensions. Together, these increased demand for foreign exchange and weighed on the rupee, adding to concerns about India's external vulnerability.

The simultaneous occurrence of all four factors was unusual, and signs suggest some of these pressures are easing. The third factor was the changing relative growth picture. India's economy and corporate earnings have continued to grow, but other markets, particularly South Korea and Taiwan, have benefited from a powerful global AI investment cycle. South Korean chip companies have seen earnings multiples, drawing capital towards the market and away from India.

Desai pointed to the changing fortunes of competing markets. South Korea, one of the biggest beneficiaries of the AI capital expenditure cycle, has seen chip-company earnings rise several times over. Yet its market is down 35% from its peak and has witnessed $150 billion of FPI selling this year, he said. “When you take Brazil, you take Turkey, you take Indonesia, China, South Korea. None of these markets are now in a runaway bull market as they were a few months ago.

Some of them are actually in deep bear markets, and India is looking far more promising with its diversified growth profile,” he said. A fourth source of anxiety has been the debate over whether artificial intelligence could disrupt India's services exports, one of the country's most important sources of foreign exchange earnings. The concern is that AI could automate work traditionally outsourced to Indian IT companies, undermining the sector's growth and, eventually, the services surplus that cushions India's current account.

Desai pushed back against this fear, arguing that the disruption is not yet visible in the numbers. “If AI was disrupting services, it should have shown up in the numbers, but it's not showing up,” he said. He identified the proliferation of global capability centres (GCCs), which allow multinational companies to build their own teams in India, as a more immediate competitive pressure for IT services companies.

He also argued that India was punching above its weight in services. Services exports have grown substantially over the past 15-20 years, providing a much larger cushion against the country's merchandise trade deficit and oil imports. If the market is pricing in a lasting erosion of this revenue stream before it appears in the data, the risk of excessive pessimism is real. Why the external pressures may ease

The veterans believe the four pressures on India's balance of payments are unlikely to remain equally intense. The combination of heavy gold imports, weak net FDI, foreign portfolio outflows and elevated oil prices created an unusually difficult environment for the rupee. A reversal or moderation in even some of these factors could improve the external picture. Desai also argued that investors may be overestimating India's vulnerability to crude oil prices by relying on an outdated comparison with the 2008 oil shock.

When crude touched about $140 a barrel in 2008, India's annualised July oil import bill would have amounted to nearly 13% of GDP, according to his calculations. At $120 a barrel today, with current import volumes, the bill would be less than 4% of GDP. The economy has expanded significantly since then, while services exports have multiplied, providing an additional buffer against the cost of energy imports.

Desai's point is not that India is no longer vulnerable to oil shocks, but that the country can absorb them much better. There is also a currency argument. The rupee is undervalued on a real effective exchange rate basis, Desai has argued. He argues that this may or may not mean the INR/USD has formed a bottom, for at least 50% of that would depend on how the dollar moves. A global crisis and a sharp appreciation of the dollar could still put pressure on the rupee, but that is an unpredictable external risk rather than evidence of a structural deterioration in India's economic position.

One critical point is that foreign investors may be interpreting the recent pressure on the rupee and the balance of payments as evidence of a more persistent weakness in India's economic momentum. The veterans suggest that interpretation may be too pessimistic. The case for a recovery The strongest argument for better returns lies in the combination of more attractive entry valuations and the prospect of earnings growth.

After two years of price correction and time consolidation, valuations have become more reasonable. The June 2026 outlook of 3P Investment Managers noted that the Nifty's one-year forward price-to-earnings multiple had fallen to 18.4 times, broadly in line with its 10-year average. India's valuation premium over emerging markets had also moderated to 74%, close to its 10-year average. Jain expects the next three years to be stronger for equities.

His investment manager's June outlook projected Nifty returns of 14-15% CAGR over three years, or 45-50% cumulatively, assuming low-teens earnings growth and a recovery in the valuation multiple to 19.5 times. While foreign capital remains important to India's growth ambitions, Jain is sceptical of the idea that the return of foreign investors is a necessary precondition for a sustained market recovery.

“No one knows the answer to when FII selling ends,” he said, adding that over a three-year period, market returns do not have a strong correlation with foreign flows. He pointed instead to the resilience of domestic investors and the market's ability to absorb substantial supply. Monthly SIP inflows of around ₹30,000 crore have continued despite weak market returns. The market has also absorbed close to $100 billion raised over two years through IPOs, offers for sale and block deals.

“If FIIs are selling and markets are holding, then sentiment is good,” Jain said. Desai also suggested India's diversified growth profile could regain investor attention as global market leadership narrows and the AI trade loses some momentum. Foreign capital remains important for India, but its return will depend on relative earnings growth and returns from Indian assets, not on tax concessions or policy signals alone.

Prakash's warning is that India cannot take its long-term growth advantage for granted. To regain global investor confidence, the country needs to deliver on earnings, productivity, and the quality of its companies. But the scale of the recent underperformance, the sharp reduction in India's weight in emerging-market portfolios and the moderation in valuation premiums also mean that expectations have been reset.

None of the market veterans believes Indian equities are insulated from global risks. But their central argument is that the exceptional combination of factors behind India's recent underperformance may be easing. With valuations closer to historical averages and earnings growth holding up, the medium-term return equation looks considerably better than the prevailing mood suggests.