It is one of the most challenging times for emerging market investors, thanks to geopolitical uncertainty, elevated bond yields, sticky inflation, and sharp currency volatility.
Foreign portfolio investors (FPIs) have been turning increasingly selective about where they deploy capital. For India, the question is whether it can still command premium attention amid rising global competition and shifting risk appetites?
FPIs have taken out over ₹2.6 lakh crore from the Indian capital market till 12 June this year, as per NSDL data. In Indian equities, they have offloaded ₹2.9 lakh crore year-to-date.
The major reasons behind this selloff have been the mismatch between earnings growth and valuations, the lack of AI play, strength in the US dollar and bond yields, the Middle East conflict, and the rupee’s weakness.
FPIs have been selling lately even as India’s economic growth outlook remains healthy despite a challenging environment.
The has marginally raised India’s growth forecast for 2026-27 to 6.6% from the 6.5% projected in January.
Over the last decade, India has evolved from just another emerging-market allocation to a structural growth story. With a population of 1.48 billion, over 40% under 25, strong domestic consumption, digital transformation, manufacturing ambitions, and policy continuity have made it one of the fastest-growing major economies globally.
However, in periods of heightened volatility, foreign capital prioritises liquidity, currency stability, valuation comfort, and macro resilience over long-term narratives.
Can India attract foreign capital?
Vishad Turakhia, MD and CEO of Equirus Securities, highlighted that aggregate foreign holdings in Indian equities have fallen to a 14-year low of 14.7%, while domestic institutional holdings have risen to 18.9%.
Despite the Federal Reserve cutting rates three times since late 2025, bringing the federal funds rate to 3.5–3.75%, long-end US yields remain stubbornly high.
The 10-year treasury hovers around 4.56%, supported by fiscal concerns, a stronger dollar, and renewed inflation worries.
As a result, elevated US long-end yields have historically triggered capital outflows, currency depreciation, and compression of equity valuations across emerging markets (EM).
The Indian rupee, historically more stable than peer EM currencies, has come under significant strain.
The year-to-date, the rupee has fallen 6%, hitting an all-time low of near ₹97 on May 20 before the RBI intervened aggressively via state-run banks.
For foreign investors, currency erosion directly impacts dollar-denominated returns, making rupee stability a critical variable.
India’s stood at $682.3 billion as of June 5, adequate to provide import cover for about 11 months.
Turakhia pointed out that India continues to trade at a nearly 40% premium to the MSCI EM Index- roughly 3% above its long-term average. India’s trailing P/E has rarely dipped below 21 times over the 2022–2026 period, while peers such as Brazil (nearly 11 times) and South Korea (nearly 17 times) trade at significant discounts.
Turakhia added this premium reflects India’s earnings visibility, domestic demand strength, political stability, and governance quality — but it also makes India more vulnerable during risk-off periods, when valuation and the most attractive alternatives matter most.
Unlike export-heavy economies, India’s growth is driven by domestic consumption and services, providing relative insulation from global trade disruptions. The expanding middle class, rising formalisation, and digital penetration continue to create long-duration opportunities across financial services, healthcare, technology, and manufacturing.
“The current government, in its third consecutive term since June 2024, has delivered predictability that global investors value. In addition, continued focus on infrastructure spending, PLI schemes across electronics, solar, and semiconductors, and ease-of-doing-business reforms have reinforced institutional confidence and strengthened India’s positioning as an alternative manufacturing hub,” Turakhia, noted.
“The ongoing diversification of global supply chains away from China remains a major structural opportunity. Multinationals seeking geographic diversification have increasingly turned to India across electronics, chemicals, engineering, defence, and renewables. This repositioning could support sustained inflows over the medium- to long-term,” Turakhia added.
There are significant risks that can weigh on sentiment. These include US 10-year yields staying above 4.5%, crude oil price volatility, slower earnings growth, excessive valuations, and weakening domestic consumption.
Among these, sustained US yields, crude shocks, and currency pressure remain the most immediate risks.
On the other side, an India-US bilateral trade deal, crude correcting below $90 per barrel, rupee stabilisation, and a clearer Fed easing trajectory could meaningfully revive FPI flows.
“India occupies a unique position in the EM universe — no longer a cyclical trade, but increasingly a long-duration structural allocation. The real test is whether it can sustain strategic investor confidence through global uncertainty,” said Turakhia.
“India’s macro resilience, reform momentum, and domestic growth engine keep it among the strongest contenders for global capital. The challenge ahead is maintaining this advantage while balancing growth, valuation discipline, FII taxation and currency stability in an increasingly fragmented world,” Turakhia said.
Disclaimer: This story is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.