FII selloff: Foreign institutional investors (FIIs) have sold Indian stocks worth $12.8 billion on a year-to-date (YTD) basis, signalling a shift to other markets offering better risk-reward setups.
Despite the macroeconomic setup remaining steady, the Indian earnings momentum is clearly lagging. This moderation in sentiment is already reflected in fund flows.
According to Elara Capital, FIIs are likely dumping Indian stocks for other emerging markets like South Korea, Taiwan, and China, where tailwinds, earnings upgrades, and cheaper valuations provide a much better value-growth proposition.
“The Nifty index delivered just 4% YoY USD EPS growth-placing it in the mid to bottom quartile among global markets. Yet, India trades at a forward P/E of 19.4x (2FY), significantly above its long-term average of 17.1x and well ahead of the MSCI EM’s forward P/E of 12.6x. Even with a top-tier 2026 ROE of 14.4% among EM and Asian peers, India’s profitability does not fully offset the disconnect between high valuations and subdued earnings growth,” Elara Capital said.
In contrast, many South Asian peers like South Korea and Taiwan have delivered 45% and 20% EPS growth, respectively. While China is emerging from a prolonged revision slump, India appears to be entering one, opined Elara analysts.
Over the past three months, the consensus earnings estimate for India fell by 1.8%. In comparison, China saw a +3.7% upward revision, and MSCI EM posted a modest +0.2% increase, the data showed.
Apart from the valuation-earnings mismatch, the US trade tariff overhang has added to market uncertainty and contributed to rotation out of Indian equities.
But not all is lost.
The Indian stock is market is not without its catalysts — Rate cuts from the Reserve Bank of India (RBI), GST reform proposal, liquidity push and rural consumption revival post-monsoon offer hope.
What could bring FIIs back to Indian stock market?
According to analysts, for FII to make a comeback, a few things need to fall in place, the foremost being superior earnings delivery.
If USD EPS CAGR accelerates toward 12-14% in the next few years, led by upward revisions in value-aligned sectors such as Financials, Staples, Discretionary, and Infrastructure, FIIs could become sustainable net buyers despite India’s relative richness, opined Elara Capital.
Meanwhile, G Chokkalingam, Founder & Head of Research, said that the India Inc earnings should improve from the October-December quarter earnings. “And that is the time I feel FPIs would come back.”
This would likely be driven by four factors aligning – a compromise on Trump tariffs, good monsoon progress, a GST reform boost, and an oil price decline.
“Any compromise on Trump due to geopolitical compulsions – even a small compromise can be beneficial for India. Second, the monsoon progress is very good, and inflation is going down; and the reversal of the interest rate cycle is inevitable. Therefore, corporate earnings would improve,” Chokkalingam said.
Third is the GST reform. “If there is more than ₹50,000 crore sacrificed from the government, that would also boost sentiment. Fourth, oil price. Historically, in the last 20 years, oil prices have helped the Indian economy and markets to bounce back in a significant way. Even in a normal deflationary condition, like January-February 2016, when oil prices hit a seven-year low, the market here bounced back,” Chokkalingam explained.
Echoing similar views, Amar Ranu, Head – Investment Products & Insights, Anand Rathi Shares and Stock Brokers, said that a mix of factors, such as stronger earnings growth, attractive valuations, and stable macroeconomic policies, will be key to reviving foreign investor interest in Indian equities.
On the external front, a softer US Fed stance and weaker dollar would make Indian assets more appealing, while heightened geopolitical risks or fresh tariff measures could dampen sentiment, opined Ranu.Ma