Foreign investors and Indian equities seem to be back in one of their familiar on-again, off-again phases.
After pumping more than $5 billion into Indian stocks over two months, (FPIs) have turned sellers again in September. They have pulled out more than $1 billion so far this month, taking their total outflow for the year to more than $25 billion, according to NSDL data, Bloomberg reported.
The latest selling comes even as some of the concerns that had kept foreign investors away from India have started to ease.
The global frenzy around artificial intelligence has cooled a little. India has also delivered strong economic growth and earnings numbers. A weaker dollar could further reduce pressure on the rupee and make Indian assets more attractive to overseas investors.
But there are still enough reasons for foreign investors to stay cautious.
Global bond yields have risen, making emerging-market stocks look relatively less attractive. Crude oil has also climbed back towards $100 a barrel, raising concerns for India, which imports most of its oil.
Still, the recent jump in oil prices has largely happened only in the past few days, suggesting that it may not fully explain the latest FPI selling.
The debate over India’s appeal among foreign investors is far from settled.
Morgan Stanley remains positive on Indian equities. Its strategists recently described India as being in a “multi-quarter growth upcycle”, arguing that stronger investment and earnings could support the market.
The brokerage also believes the recent decline in valuations could be cyclical rather than a sign of a deeper problem. Artificial intelligence, it argues, could eventually help India improve productivity.
Macquarie, however, is more cautious about the road ahead. Its global strategist Viktor Shvets has acknowledged that India’s economic and credit data have been better than expected, while private-sector investment has also picked up. But he has flagged persistent inflation and the longer-term threat that AI could pose to India’s large technology industry.
India’s technology sector, worth more than $325 billion, is a major source of exports, jobs and consumer demand.
Shvets expects India’s long-term real economic growth to slow to around 6%-6.5% unless the government increases spending or the country manages to capture productivity gains from AI.
Another concern is the shortage of manufacturing jobs. According to Shvets, this could increase economic and social divisions.
He expects earnings per share for the MSCI India Index to grow at a low double-digit rate from here, compared with around 17% expected for 2027.
At the same time, Indian equities continue to command a relatively high premium. India’s equity risk premium is around 4.5%, compared with roughly 6%-9% across several other emerging markets, Japan and China.
Even so, Shvets sees India as having “better than average prospects”, particularly because it could remain relatively protected from the disruption caused by AI.
Bloomberg Intelligence’s Nitin Chanduka offers a more practical explanation for why foreign investors are yet to make a strong comeback.
Despite nearly $60 billion leaving Indian equities since September 2024, the broader market has held up surprisingly well. Indian benchmark indexes have not fallen as sharply as they did during earlier episodes of heavy foreign selling.
But the recent recovery has not lasted.
India continues to be among the most heavily sold emerging markets. Financials, information technology, consumer staples, energy and autos have seen the most FPI selling since September 2025, according to Chanduka’s analysis.
The Nifty 50 has also spent 130 days below its 200-day moving average — its longest such stretch in almost a decade.
Valuations are another hurdle. The median trailing price-to-earnings ratio for NSE 500 companies is around 33 times, which remains expensive by historical standards.
Financial stocks offer another clue. They have traditionally been a favourite among foreign investors, but India’s financial sector has recovered much more slowly than its global peers.
That makes it harder for FPIs to make a strong return to Indian equities despite the country’s relatively healthy growth outlook.
Chanduka describes the foreign inflows seen over the past two months as a “tiptoe” into Indian markets.
The latest reversal suggests that description may still be generous.
For now, foreign investors appear willing to test Indian waters — but they are nowhere close to taking the plunge.