There is a shift in the investing landscape in the emerging markets, as India – once a foreign investor darling – is losing sheen as FIIs move to cheaper alternatives like Taiwan, South Korea, Brazil and China.
According to a recent Nomura report, Indian stocks have become the biggest underweight allocation for emerging market (EM) investors. In July, investors reallocated capital from India to markets like Taiwan, Hong Kong/China, and South Korea. As per Nomura’s analysis of large EM funds, 71% of them were underweight on India at the end of July, up from 60% at the end of June, according to data cited in a Bloomberg report.
Nomura strategists, including Chetan Seth, noted that EM funds’ relative allocation to India declined significantly by 1 percentage point month-on-month in July, while allocations to Hong Kong/China, Taiwan, and Korea saw a corresponding increase.
This analysis comes on the back of a Bank of America (BoFA) survey, which showed India has gone from fund managers’ top Asian pick to their least preferred in just three months.
FII selling worth $12.8 billion so far in 2025 underscores the weakening appeal of Indian stocks for foreign investors. According to Elara Capital, the preference has likely shifted towards South Korea, Taiwan, and China, where valuations are more lucrative.
Why are FIIs dumping Indian stocks for other EMs?
1. Earnings slowdown
Elara Capital said that India’s USD EPS growth for the June quarter was just 4% YoY, placing it in the lower half of global markets. Despite this, valuations remain elevated as the Nifty trades at 19.4x two-year forward P/E, well above MSCI EM’s 12.6x.
Consensus estimates project India’s USD EPS CAGR at 9% for CY24-26, lagging behind MSCI EM’s 14%. Earnings momentum has weakened, too. FY26 earnings estimates for India were cut by 1.8% over the past three months, while China saw upgrades of 3.7% and MSCI EM rose 0.2%.
However, sustained earnings delivery and consistent upgrades will be
critical for restoring FII interest in Indian equities, it added.
2. Trump tariff tantrum
As the US boosted tariffs on India to one of the highest in the world at 50%, FIIs are growing wary of Indian stocks.
“Ongoing geopolitical and trade/tariff uncertainties cloud India’s near-term outlook. The recent increase in US tariffs on Indian goods under Trump’s trade policies, along with cautious corporate earnings guidance, is contributing to a more defensive approach by global investors,” said Ross Maxwell, Global Strategy Lead at VT Markets.
3. Valuation conundrum
India’s stock market has delivered good returns over the last few years, with benchmark indices Nifty 50 and Sensex hitting record highs. However, this rally has made Indian equities relatively expensive, especially when compared to other markets in Asia and Latin America, said Maxwell.
Emerging markets such as Taiwan, South Korea, Brazil, and Indonesia are becoming more attractive due to lower valuations and sector-specific opportunities, he said.
Elara also opined that South Korea, Taiwan, and China, provide much better value-growth propositions amid tech tailwinds, earnings upgrades, and cheaper valuations.
4. Profit taking
Another reason for this shift is profit-taking, said analysts. “With FIIs having enjoyed strong gains in India and are now reallocating capital to underperforming or undervalued markets with better near-term upside,” Maxwell noted.
Can FII selling trend reverse?
While the FII selloff is keeping Indian stock markets subdued despite a flush of liquidity from domestic investors, analysts believe that this rotation is more strategic, rather than a loss of confidence in India’s fundamentals.
“Despite this outflow, it is important to note that India remains a structurally strong, long-term investment destination thanks to its demographic, digital transformation, and macroeconomic resilience,” said Maxwell.
Rajini Vislavath, CIO of Alternatives-LGT Wealth India, said that reversing this trend would require stable policy frameworks, improved corporate governance, enhanced earnings growth, and further easing of regulatory hurdles.
In the medium to long term, India’s strong fundamentals such as digital growth, demographic strength, and macro resilience are expected to re-attract FII interest, Maxwell added.