Zerodha cofounder Nithin Kamath recently remarked that foreign investor interest in India has largely diminished. This statement has ignited discussions about the current state of foreign investments in Indian equities, a trend that has been evident in various reports.
According to DSP Mutual Fund’s Netra report, foreign investors have not seen returns in Indian stocks for over four years. In April alone, foreign institutional investors (FIIs) sold domestic equities worth ₹48,210 Cr, continuing a trend that has seen them offload shares worth ₹1,79,335 Cr year-to-date.
Current Market Dynamics
As India Inc approaches the Q4 FY26 earnings season, the market is influenced by two main factors: cyclical elements such as global liquidity tightening and rising US yields, alongside structural concerns regarding India’s valuation premium and its earnings growth potential.
Between September 2024 and November 2025, foreign portfolio investors (FPIs) withdrew nearly $28 billion from Indian equities, bringing foreign ownership to a 14-year low. India has also become the second-largest underweight position in emerging market portfolios.
Cyclical vs. Structural Factors
The recent outflows can be attributed to cyclical factors, including elevated US bond yields that make risk-free dollar returns more appealing, and geopolitical tensions that have heightened risk aversion. However, there is also a structural shift occurring, as investors reassess India’s growth story in comparison to markets like Japan and South Korea.
Data reveals that in 2025, FPIs sold approximately $18.9 billion worth of Indian equities, driven by persistent earnings downgrades and concerns about recovery speed. India's weighting in the MSCI Emerging Markets Index has dropped from second to fourth place, which may lead to passive outflows regardless of the underlying fundamentals.
Valuation Adjustments
While the Nifty 50 currently trades at around 20 times earnings—still above the emerging market average—this represents a significant correction from the extremes seen in 2023-24. Historically, India traded at a premium of up to 73% compared to emerging markets, a figure that has now compressed to approximately 27%.
The underlying strengths of India, such as demographics and digital infrastructure, remain intact. The issue lies in the high prices investors were willing to pay amid disappointing earnings growth.
Future Outlook
For foreign investments to recover, clarity on currency stability, earnings, and macroeconomic conditions will be crucial. The Indian rupee's depreciation against the dollar has affected returns for foreign investors, making currency stabilization a priority. A potential trade agreement between India and the US could enhance the investment landscape.
Earnings performance in Q4 FY26, particularly in the banking and capital goods sectors, will be a key indicator of future investor confidence. Additionally, fluctuations in oil prices, which have recently risen due to geopolitical conflicts, will also impact inflation and currency stability.
Policy Considerations
While not the main driver, government policy can influence investment decisions. Simplifying the long and short-term capital gain tax framework could send a positive signal to investors.
Despite the cautious sentiment, FPIs have not completely exited the Indian market. Their approach has shifted towards more selective investments, favoring sectors with strong earnings visibility and domestic demand, such as telecom and capital goods.
Conclusion
In summary, while foreign capital flows have slowed, the overall outlook for India Inc remains constructive. Corporate balance sheets are healthier, and ongoing capital expenditure in infrastructure and manufacturing is expected to support future earnings growth. However, recovery will depend on a combination of stable macroeconomic conditions and strong corporate performance in the upcoming earnings season.
