A majority of global emerging-market (EM) investors continue to remain underweight on India despite the recent rebound in domestic equities, suggesting there is still room for foreign inflows if valuations become more attractive, according to a report by Jefferies.

The brokerage analysed 70 large emerging-market funds managing assets of about $320 billion as of March 2026 and found that 61% of them were underweight India relative to benchmark allocations. On average, these funds were underweight by 0.4 percentage points, a positioning that Jefferies believes may have become even more pronounced during the June quarter.

The findings underscore the challenge India faces in attracting incremental foreign capital despite being one of the world’s fastest-growing major economies. While investors remain constructive on the country’s long-term growth prospects, many continue to be deterred by valuations that remain significantly richer than those of other emerging markets.

Indian equities continue to trade at roughly a 70% premium

According to Jefferies, Indian equities continue to trade at roughly a 70% premium to the broader emerging-market universe. That valuation gap has become harder to justify at a time when India’s earnings growth is lagging many of its peers.

The brokerage noted that while corporate earnings growth is expected to improve over FY27 and FY28, it is still likely to trail that of the broader EM basket. Factors weighing on earnings include the impact of rupee weakness, the effect of elevated oil prices earlier in the year and concerns around a potential El Niño-induced disruption to the monsoon.

Although the recent easing in oil prices following the US-Iran ceasefire has reduced one key risk, Jefferies believes investors remain cautious about the near-term earnings outlook.

The underweight positioning is significant because foreign portfolio flows have historically played an important role in driving Indian equity market performance. Any improvement in earnings visibility, moderation in valuations or acceleration in economic growth could encourage global investors to raise allocations towards benchmark levels.

For now, however, many global fund managers appear content to stay on the sidelines. The report suggests that despite India’s strong structural story, foreign investors continue to seek a more compelling combination of earnings growth and valuation before increasing exposure.

A few days ago, Citi Research said India’s allocation in Global Emerging Market (GEM) funds is at a five-year low. The brokerage noted that India’s weight in the global emerging market index has declined from around 20% in mid-2024 to about 11%, while global portfolios remain close to a 20-year high underweight position on Indian equities.

According to Citi, foreign investor sentiment towards India remains subdued amid persistent geopolitical uncertainty and the associated macroeconomic challenges. The brokerage also highlighted concerns that India is not a significant participant in the global AI infrastructure buildout, making it important to monitor the medium- to long-term implications for employment, wages and consumption.

The Jefferies findings also highlight a broader divergence between domestic and foreign investors. While domestic institutions and retail investors have continued to provide strong support to the market, overseas investors remain more selective, preferring to wait for either stronger earnings momentum or a narrowing of India’s valuation premium relative to other emerging markets.

That leaves India in an unusual position: admired for its long-term growth prospects, but still under-owned by a majority of large emerging-market funds.