Expert view: History suggests that foreign flows typically return when valuations become more compelling. That can happen through a market correction, through a period of earnings catching up with prices, or through some combination of the two, says Pradeep Gupta.
Expert view: Pradeep Gupta, Chairman & MD, Anand Rathi Share and Stock Brokers Limited, believes that if foreign investors had genuinely lost confidence in India’s long-term prospects, they would be avoiding both secondary-market stocks and primary issuances.
He added that foreign investors (FIIs) participation in IPO anchor books has remained remarkably strong even during periods of heavy secondary-market selling.
In an interview with Mint, Gupta shared his views on the current outlook of FIIs and what can bring them back to India. Edited excerpts:
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FIIs are moving to markets like Taiwan and South Korea for AI-linked tech opportunities. Is this a permanent structural shift into global AI tech?
The word “permanent” is doing too much work here. What we are witnessing looks less like an exodus from India and more like a stampede towards AI. Global investors are chasing the one trade that has consistently worked over the past year: direct exposure to the AI investment cycle. Taiwan and South Korea happen to own the picks and shovels of that boom. Taiwan has TSMC, which fabricates most of the world’s leading-edge AI chips. South Korea has Samsung Electronics and SK Hynix, whose memory chips sit at the heart of AI infrastructure. Together, these companies have become some of the largest beneficiaries of the surge in AI-related capital expenditure.
India simply does not have a listed company that offers comparable exposure. A global fund manager looking to build a semiconductor or AI-hardware portfolio can find numerous options in Taipei or Seoul, but very few in Mumbai. That has inevitably influenced capital flows. South Korea has overtaken India in market capitalisation rankings, while Taiwan and Korea have emerged as some of the biggest beneficiaries of the global AI trade.
However, capital flows are rarely permanent. Foreign investors have repeatedly left and returned to India over the past three decades. The trigger has almost always been relative valuations and relative growth prospects rather than a fundamental reassessment of India’s long-term story.
The more important point is that today’s AI boom remains heavily concentrated in hardware. Over time, the benefits will spread further down the value chain into software, data centres, power infrastructure, digital platforms and enterprise services. Those are areas where India possesses far greater depth and competitiveness. India’s challenge is not that investors have stopped believing in the country. It is that the country does not yet offer enough listed ways to participate in the current phase of the AI boom. What we are seeing, therefore, is a cyclical rotation towards immediate AI beneficiaries rather than a structural shift away from India.
The heaviest FII selling is concentrated in our two biggest heavyweights — Banking and IT. Have Indian corporates hit an earnings ceiling that is scaring global investors away?
The evidence suggests otherwise. Banking and IT account for close to 40% of the Nifty and an even larger share of foreign institutional ownership. When global investors decide to reduce exposure to India, they naturally sell what they own in size and what offers the deepest liquidity. The pattern reflects market plumbing as much as market pessimism. Put simply, foreign investors are selling what they can sell, not necessarily what they dislike most.
The fundamentals hardly support the notion of an earnings ceiling. Indian banks continue to report strong capital adequacy, healthy asset quality and double-digit credit growth. Loan growth and margins have moderated from exceptionally strong levels, but that reflects normalisation rather than deterioration.
The IT sector is facing a more challenging environment, but again the issue is cyclical rather than structural. Global clients are still digesting the post-pandemic surge in technology spending and remain cautious on discretionary projects. Yet India’s leading IT companies continue to generate strong cash flows, maintain robust balance sheets and retain their strategic importance in global technology spending.
The real challenge is relative rather than absolute. In a market captivated by AI, investors can buy semiconductor and AI-infrastructure companies growing earnings at 30-50% annually. Against that backdrop, a large Indian bank or IT company delivering earnings growth in the low-to-mid teens inevitably looks less exciting. Capital is therefore flowing towards faster-growing opportunities rather than fleeing a deteriorating Indian corporate sector.
Indeed, broader indicators such as capacity utilisation, corporate fundraising, bank credit growth, order books and project announcements continue to suggest that India’s capex cycle is gradually strengthening rather than rolling over.
What is the single biggest trigger that will bring foreign investors back to India?
Valuation. Most other explanations are secondary. India’s underlying investment case remains largely intact. Economic growth continues to outpace most major economies. Inflation is broadly under control. Fiscal consolidation is progressing. Corporate balance sheets are healthier than they have been in years. Domestic savings continue to flow steadily into financial assets. What has changed is not the story but the price investors are being asked to pay for it.
For several years, Indian equities have traded at a substantial premium to most emerging markets. Some of that premium is deserved. India offers stronger growth, greater macroeconomic stability and better corporate governance than many peers. But even the best story becomes difficult to justify when valuations move ahead of fundamentals. The depreciation of the rupee has compounded the problem. Even where local currency returns have remained respectable, dollar-based returns have been less attractive for foreign investors.
History suggests that foreign flows typically return when valuations become more compelling. That can happen through a market correction, through a period of earnings catching up with prices, or through some combination of the two. Foreign investors rarely object to growth. What they object to is overpaying for it. The next major wave of foreign inflows is therefore likely to arrive not when India’s story changes, but when its price tag becomes more attractive.
FIIs are ruthlessly selling existing stocks in the secondary market, yet still pumping thousands of crores into new IPOs. Why reject India’s blue chips but bet on primary listings?
Nothing exposes the weakness of the “FIIs are abandoning India” narrative more clearly than their behaviour in the IPO market. If foreign investors had genuinely lost confidence in India’s long-term prospects, they would be avoiding both secondary-market stocks and primary issuances. Instead, foreign participation in IPO anchor books has remained remarkably strong even during periods of heavy secondary-market selling. The explanation is straightforward.
India’s large-cap indices are dominated by banks, IT services companies and other mature businesses that have already enjoyed substantial rerating over the past decade. These remain excellent businesses, but many now offer moderate rather than spectacular growth prospects.
The IPO market, by contrast, is increasingly where India’s next generation of growth companies is choosing to list. Specialised manufacturing, defence, electronics manufacturing services, healthcare, consumer brands, digital platforms and emerging technology businesses are all far better represented in the primary market than in benchmark indices.
For foreign investors, many of these companies offer stronger earnings growth, longer runways and business models that are less fully understood and therefore potentially less efficiently priced. What appears to be a contradiction is actually a reallocation. Foreign investors are selling mature, fully-priced businesses and redeploying capital into newer companies where they see greater long-term upside. They are not leaving the Indian growth story. They are simply editing the cast list.
In 2026, FIIs have pulled out a record ₹2.2 lakh crore, yet the Nifty is down only about 11%. What does that tell us?
This may be the most important structural development in Indian equities over the past decade. A decade ago, an outflow of this magnitude would have been treated as a market emergency. Foreign investors dominated market liquidity, and large-scale selling often translated into severe market declines. When foreigners exited, there were simply not enough domestic buyers to absorb the supply. Something fundamental has changed.
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Despite record FII outflows of roughly ₹2.2 lakh crore, the Nifty has corrected only around 10-11%. Domestic institutions have absorbed most of the selling pressure. Mutual funds, insurance companies, pension funds, provident funds, family offices and retail investors have emerged as a powerful counterweight to foreign capital. The rise of systematic investment plans has been particularly important. Monthly SIP inflows now consistently exceed ₹30,000 crore. Unlike previous cycles, domestic investors have continued to invest through periods of market weakness rather than retreating from them. The result is a market structure that is far more resilient than in the past.
Foreign investors remain extremely important. They still influence liquidity, valuations and sentiment. A ₹2.2 lakh crore outflow cannot simply be ignored. But they no longer possess the ability to dictate market direction in the way they once did.
The most important story in Indian equities today may not be what foreign investors are doing. It may be what Indian savers are doing. The rise of domestic capital has not made FIIs irrelevant. It has merely ended their monopoly on influence. That is a profound structural change, and one of the strongest reasons to believe that Indian equities are likely to become more resilient over the coming decade.
Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.
