Foreign portfolio investors are not turning bearish on India, they are simply turning cautious as geopolitical tensions and volatile crude prices cloud near-term visibility, said Nitin Jain, chief executive and director, Kotak Mahindra Asset Management Singapore.
Jain said global investors are struggling to price risk amid the West Asia conflict. “India has been caught on the wrong side from an energy price perspective… while it is not our war, we are caught into it.”
Dominant view among foreign investors
For now, the dominant view among foreign investors is that the conflict is likely to be transient, provided oil remains in the $80–85 range. Jain said a $10 rise in crude typically knocks off 15 basis points from the GDP, a manageable hit for an economy that has consistently surprised on the upside. Corporate earnings, however, may see uneven effects – oil marketing companies could face margin pressure, while refiners, petrochemical players and exporters may benefit from currency and margin tailwinds.
“Most businesses will not get impacted. With valuations correcting, India has become an interesting play,” said Jain. Despite the global uncertainty, India has not witnessed meaningful FPI outflows. FPIs still hold over $820 billion in Indian equities, and net selling over the past five years totalled just $13 billion.
While foreign investors sold nearly $60 billion in the secondary market, they have also reinvested $40–45 billion into IPOs, effectively rotating, rather than exiting. However, India remains underweight in global portfolios, especially compared with markets that have rallied sharply on the back of the AI cycle.
“The bigger concern is under allocation. India has materially underperformed global peers for 12–18 months, and FPIs are now underweight on India relative to other markets,” said Jain, who highlights the imbalance with a striking comparison – “All of India put together is less than FPI holdings in one single Taiwanese stock, TSMC.”
What will decisively bring FPIs back is not just geopolitical stability, but policy clarity as well. Jain believes that India must reduce friction for foreign capital, particularly around capital gains tax. “If I, as an Indian, invest in the US market, I pay zero taxes. The US attracts global capital because it makes it frictionless.”’
Currency stability as a factor
Currency stability is another critical factor. A weakening rupee erodes dollar returns even when equity markets rise, and FPIs still pay taxes on rupee-denominated gains. “Nobody wants to invest in a weaker currency unless the growth compensates for it. Over long term, for attracting large capital flows, the currency should be stable.”
Valuations, once a major deterrent, are no longer a stumbling block. India will never be cheap as long as it grows at 7% while the rest of the world struggles at 2–3%, but the valuation premium has corrected meaningfully. Nifty forward multiples have eased from 24–25 times to below 20 times, and midcap premiums have normalised as earnings have outpaced prices. Jain agrees with the debate around midcap valuations, but emphasises that earnings strength, balance-sheet repair and improved liquidity justify part of the premium.