Since the start of the Iran war in late February, foreign institutional investors (FIIs) have pulled out a whopping $19 billion, or about Rs 1.78 lakh crore, from Indian equities, causing the Nifty to fall more than 9 per cent from its 52-week peak. What was once one of the world’s favorite emerging markets has now rapidly turned into a “no-go” zone due to global capital flight amid rising energy prices. The sharp fall in the market has brought valuations to fair levels, yet institutional desks are not yet signaling a “strong buy”. Instead, a kind of uneasiness has taken over, as the mathematical equation for dollar-based investors has gone completely haywire.
Market data from Elara Securities shows that India remains an exception among emerging markets as selling by FIIs continued for the 5th consecutive week. On the other hand, foreign investors are continuously investing money in other emerging markets. Let us also tell you what are those 7 reasons due to which stock market investors are very scared of the Indian market…
Foreign investors are scared of these things
- Ceasefire became an illusion: The two-week pause in the Iran-US conflict brought some momentum to the markets, but institutional investors are not considering it as a turning point. Foreign investors (FIIs) consider this pause not as diplomatic but as strategic. In view of the fear of blockade and the increasing danger of the second phase of conflict, global funds are adopting a neutral stance until a long-term deal is signed. In market parlance, this is a momentary surge and savvy investors understand this very well.
- Crude Oil: Double deficit time bomb: Brent crude approaching $100 per barrel is not only an energy-related problem for India, but is also a threat to broader stability. FIIs are well aware of the twin deficit trap: higher oil prices widen the current account deficit and also drive up domestic inflation, putting pressure on the Reserve Bank of India to raise interest rates just when the economy needs relief the most.
- Risk premium reduced: The mathematics has completely changed for foreign investors. As the US 10-year Treasury yield moves towards 4.5 per cent, the risk premium for investing in Indian stocks has declined sharply. The weakening of the rupee has made this problem even more complicated. Recently the rupee had reached the level of 95 against the dollar.
- Other markets giving higher returns: India is giving very low returns to foreign investors compared to other emerging markets. Markets like South Korea and Taiwan are considered more attractive from the perspective of foreign investors, as the income growth expectations in these countries are much higher than India’s modest projections for FY 2027.
- India’s tax system is also in trouble: India’s changing tax system is being seen as a structural barrier. In the Union Budget 2024, short-term capital gains were increased from 15 percent to 20 percent and long-term capital gains were increased from 10 percent to 12.5 percent. Coupled with the change in LTCG/STCG structure and increase in Securities Transaction Tax (STT) from FY27, entry and exit costs for global funds have increased significantly. Compared to the tax-friendly regimes in competing destinations like Vietnam or Indonesia, India’s framework is no longer as attractive as it once was.
- Zero returns for four and a half years: Perhaps the most talked about figure among global investment banks is this: in US dollar terms, Nifty has given almost zero CAGR since the end of 2021. For a global fund manager who held Indian stocks for more than four years, and then saw all his capital gains wiped out as the currency fell, proposing a re-entry to the investment committee becomes a very difficult conversation.
- Earnings Shock: Beyond the current geopolitical crisis, a deeper fear is brewing: India Inc. Fear of a structural decline in earnings. Supply chain disruptions due to the war and increase in input costs are expected to have a significant impact on Q1 and Q2 margins of India’s manufacturing and FMCG sectors. It seems that FIIs, anticipating this earnings shock, are exiting the market even before the official data comes out, while macro data is already indicating this. The double-digit earnings growth that was expected to mark FY27 is now under serious threat. If the geopolitical storm persists, this growth could be down to single digits, delayed for at least two quarters, and perhaps even further structurally.
