Is this the start of rotation back into Indian equities?

Indian companies perceived as Dull brick and mortar businesses, have received no love from Foreign Portfolio Investors (FPIs) since September 2024 as they chased exciting AI plays in Korea and Taiwan (refer Graph 1 below).

Graph 1: India had large outperformance over Korea post covid till the recent ‘AI driven rally’

Past performance may or may not be sustained in the future.

MSCI India underperformed the MSCI EM index by ~30.1% in CY25 and by another 33.8% YTD in CY26 (till June 2026). Cumulative foreign portfolio investor (FPI) outflows from India since Indian indices peaked in September 2024 has been USD 53 bn.¹ India’s weight in the MSCI EM index has dropped from a high of 20% in Sep 2024 to 11% in June 2026 ².

However, there are early indications that the AI euphoria may be unravelling with FPI’s having sold USD 69 bn between Jan 2026 – June 2026 in Korea to leveraged local retail investors. For reference cumulative FPI outflows from India since Indian indices peaked in September 2024 has been ~USD 58 bn as of June 2026.

The increased concentration risk in the EM Index is vulnerable to a reversal in sentiment. A slower than expected earnings growth for AI or semi-conductor stocks could unravel these trades rapidly and have an outsized impact on benchmark performance. These risks and the significant divergence in performance of MSCI India vs EM create a persuasive case for re-evaluating India allocations.

Will this reverse the foreign investor sentiment?

The month of June and July may be the first signal in many months of a reversal of trade in favour of India.

As the ‘AI’ thematic wanes, we expect Global Emerging Markets (GEM) managers allocation to India to increase from ‘underweight’ to ‘neutral’ and India-dedicated allocations to revive during the year.

Graph 2: Will India’s underperformance to MSCI EM and World Index reverse?

Past performance may or may not sustain in the future.

The graph is only for representation and understanding purpose and does not assure any promise or guarantee that the historical data is indicative of future results.

As I wrote in India Investing-From TINA to ANTI, there has been a dramatic shift in India investing sentiment. Indian equities which have long been a relative outperformer against emerging markets and world indices has seen a massive underperformance since the Indian markets peaked in September 2024.

Table 1:Foreign Investors turn net buyers of Indian equities

The Government and RBI step in to manage the currency depreciation

The ongoing geopolitical tensions in West Asia, lack of any fresh reforms to rejuvenate the slowing Indian economy or rejuvenate interest in India for Foreign Portfolio Investors (FPIs), relative appeal of US dollar assets, contributed to the capital flight by foreign portfolio investors.​​​​​​​​​​​​​​​​

We were in a situation where foreign capital flows have been negative, and the Indian currency has depreciated against global currencies. Please read.

The RBI’s decision to tap the Indian diaspora to shore up its foreign exchange reserves seems to have steadied the Indian rupee as well. This remains a key sentiment monitorable over the coming two months in terms of the amount raised.

The Government’s decision to exempt foreign investments in government securities from any withholding tax and capital gains tax done with a view to get India included in the Bloomberg Global Aggregate Bond Index has also drawn in substantial inflows.

Economy is on a firm recovery

Barring the near term worries on the monsoon, the macro economy looks a lot better as crude oil prices declined after the temporary ceasefire between US & Iran, and on track to achieve the RBI’s revised real GDP growth estimate of 6.6% for fiscal year ending March 2027.  Despite indications that the ceasefire may be over, crude oil prices at USD 76/barrel remain far below the peak of USD 118/barrel witnessed in May 2026.³ A resurgence in the conflict may push oil prices higher and will keep INR under pressure as India imports 80% of its oil requirement.

Fundamentally, corporate India and banks enjoy healthy balance sheet and hence should be able to take near term shock of a slowing economy and escalated costs impacting margins.  The west-Asia conflict has idiosyncratic risks for India given our energy dependence and warrants some caution, but despite these risks, there is an opportunity to increase the India allocation.

Disclaimer:

Arvind Chari is a Chief Investment Strategist and has been with Quantum Advisors India group since 2004. Arvind has over 20 years of experience in long-term India investing across asset classes. Arvind is a thought leader and guides global investors on their India allocation.

This article is for educational and discussion purposes only and is not intended as an offer or solicitation for the purchase or sale of any investment in any jurisdiction. No advice is being offered nor recommendation given and any examples are purely for illustrative purposes. The views expressed contain information that has been derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness, or reliability of the information.

The views and opinions expressed in this article are my personal views and should not be construed of the Firm. There is no assurance or guarantee that the historical result is indicative of future results, and the future looking statements are inherently uncertain and cannot assure that the results or developments anticipated will be realized.