Foreign portfolio investors (FPIs) have withdrawn over ₹2.6 lakh crore from the Indian capital market till June 12, 2023, raising concerns about India's ability to maintain its appeal as a preferred emerging market. This capital flight is attributed to geopolitical uncertainties, high bond yields, and currency volatility, despite India's robust economic growth outlook.
FPIs have offloaded ₹2.9 lakh crore in Indian equities year-to-date, driven by a mismatch between earnings growth and valuations, the lack of AI play, a strong US dollar, and the rupee's weakness. Despite the World Bank raising India's growth forecast for 2026-27 to 6.6%, foreign investors are prioritizing liquidity and currency stability over long-term growth narratives.
Vishad Turakhia, MD and CEO of Equirus Securities, noted that foreign holdings in Indian equities have fallen to a 14-year low of 14.7%, while domestic institutional holdings have risen to 18.9%. The Indian rupee has depreciated by 6% year-to-date, hitting an all-time low of near ₹97 on May 20 before RBI intervention.
“India occupies a unique position in the EM universe — no longer a cyclical trade, but increasingly a long-duration structural allocation. The real test is whether it can sustain strategic investor confidence through global uncertainty.”
Vishad Turakhia, MD and CEO of Equirus Securities
India's forex reserves stand at $682.3 billion, providing import cover for about 11 months. However, India's premium valuation compared to the MSCI EM Index makes it vulnerable during risk-off periods. The country's growth is driven by domestic consumption, offering some insulation from global trade disruptions.
The ongoing diversification of global supply chains away from China presents a structural opportunity for India. Multinationals are increasingly turning to India for geographic diversification across sectors like electronics, chemicals, and renewables, potentially supporting sustained inflows in the medium to long term.
Background
Over the last decade, India has transformed from just another emerging-market allocation to a structural growth story, driven by strong domestic consumption and digital transformation. However, in times of volatility, foreign capital tends to prioritize liquidity and currency stability over long-term narratives.
Looking ahead, India must balance growth with valuation discipline and currency stability to maintain its attractiveness. An India-US bilateral trade deal, crude oil price corrections, and rupee stabilization could revive FPI flows, while sustained US yields and currency pressure remain immediate risks.
