flows into India are likely to remain muted in the near term as the country’s relative attractiveness compared to other emerging markets (EMs) weakens, according to a report by Kotak Institutional Equities.
The report flagged concerns over slowing capital inflows, rising current account pressures and weaker earnings outlook, saying India’s external capital dependence has become increasingly visible over the past two years.
“We expect FPI flows to stay muted, given India’s low attractiveness versus other EM markets,” the report said. According to the brokerage, India is facing a combination of “weaker relative FY2027E earnings growth in terms of quality and quantity,” along with “negative exposure to the ongoing AI and semiconductor cycle” and “negative exposure to commodities, especially crude oil and natural gas.”
The report added that other emerging markets currently offer stronger exposure to the artificial intelligence and commodity cycles, making them more attractive to global investors.
Kotak noted that “the continued large FPI outflows from Indian equity markets reflect the steady deterioration of relative returns amid continued compression of relative earnings growth expectations.”
The report highlighted that India has already witnessed a sharp deterioration in capital account flows in recent years. Annual capital inflows, which averaged around $73 billion during FY2019-24, declined sharply to $17 billion in FY2025 and are expected to turn negative at around $5 billion in FY2026.
Net FDI inflows have also weakened significantly. The report said annual net FDI inflows fell from $37 billion during FY2019-23 to just $1 billion in FY2025.
Kotak further warned that India’s current account deficit (CAD) could widen further due to elevated crude oil prices, putting additional pressure on the balance of payments.
“India’s external capital dependency has become more visible over the past two years” as slowing net FDI flows and rising FPI outflows coincided with a higher current account deficit driven by global energy prices, the report said.
The brokerage also observed that India has underperformed several global and emerging markets over the past five years, while MSCI India has significantly lagged the broader MSCI Emerging Markets index since August 2024.
The report suggested that unless India addresses its structural current account challenges and improves its relative earnings outlook, foreign capital inflows may continue to remain under pressure.