As foreign capital continues to sell off, the attractiveness of India's stock market has significantly declined. This market, once ranked among the world's top five, is now under pressure from structural capital outflows.
According to data, as of June 1, the cumulative net investment by Foreign Portfolio Investors (FPI) in Indian equities has fallen to 73 trillion rupees, the lowest level since 2016. This statistic, which traces back to 1993, encompasses all subsequent annual capital inflows and outflows.
Once hailed as a star among emerging markets, India's stock market is now seeing its luster fade. On one hand, oil price shocks stemming from US-Iran tensions are weighing on India's economic growth prospects. On the other hand, global capital is accelerating its flow towards economies linked to artificial intelligence infrastructure development. As a result, South Korea's stock market capitalization has surpassed $5 trillion, overtaking India to become the world's sixth largest.
Warnings have been issued that the trend of foreign capital exiting the Indian market is expected to persist until 2027.
Growth Expectations Under Pressure, India Misses Out on AI Cycle Benefits
Strategists, including Sanjeev Prasad from Kotak Institutional Equities, noted in a recent report: "Given India's relatively low attractiveness compared to other emerging markets, FPI inflows are expected to remain subdued." They pointed out that India's near-term earnings growth is projected to be slower than that of its emerging market peers, which are more focused on commodities and technology. Furthermore, India has almost no exposure to the AI and semiconductor cycle, which could last one to three years.
Carson Block, founder of investment research firm Muddy Waters Capital, stated last week that AI could replace up to 15% of high-paid knowledge workers in the US within a few years, a trend that could significantly impact the Indian economy. Given India's heavy reliance on knowledge-based service exports to the US, this assessment has further heightened market concerns about the country's medium-term growth prospects.
Domestic Capital Steps In as Foreign Funds Retreat
Venkatesh Balasubramaniam, a strategist at JM Financial Institutional Securities, highlighted in a report that the shareholding proportion of global funds in listed Indian companies has dropped from nearly 20% about a decade ago to around 15% currently. Meanwhile, driven by steady and consistent inflows from retail investors, the shareholding proportion of domestic mutual funds has risen to approximately 20%, surpassing foreign holdings for the first time.
This structural shift indicates that pricing power in the Indian stock market is gradually transferring from foreign institutional investors to domestic capital. While the continuous inflow of domestic funds provides some support to the market, the systematic withdrawal of foreign capital continues to exert persistent pressure on market valuations and liquidity. This trend may further affect the relative standing of the Indian stock market in global asset allocation.
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