Foreign investors may not return to Indian equities in large numbers in the near term, according to a report by Bernstein. The brokerage expects foreign institutional investor (FII) flows to remain flat or only moderately positive over the next 12 months.
According to Bernstein, a sustained recovery in foreign investment will depend on India’s ability to develop globally competitive industries and create new areas of innovation and economic strength.
India Needs New Engines of Global Competitiveness
Bernstein said India needs to build stronger capabilities in sectors such as advanced semiconductor manufacturing, batteries and energy storage, energy self-sufficiency and businesses that can secure a meaningful share of global markets.
The brokerage noted that some early progress is visible in areas including space, defence, semiconductors and deep-tech. However, it said most of these industries are still too small to have a significant impact on global capital allocation.
Bernstein also said it does not expect foreign investors to return in large numbers simply because the current artificial intelligence-driven investment trend eventually loses momentum. In its assessment, a structural recovery would require India to develop new sources of competitiveness, innovation and global relevance.
Foreign Investors Have Pulled Out Billions
The outlook comes after a significant shift in FII investment in Indian equities. Bernstein said foreign investors have withdrawn around USD 40 billion from Indian stocks over the past two years.
Over the last 24 months, combined FII outflows stood at USD 56.3 billion, compared with inflows of USD 38.6 billion during the previous 24-month period.
The brokerage expects flows to improve only modestly in the coming year, suggesting that any recovery could largely reflect a reduction in recent pressures rather than a major change in the long-term factors influencing foreign investment decisions.
Rupee, Valuations and Earnings Become More Important
Bernstein said the traditional relationship between India’s economic growth and FII flows has weakened. The earlier connection between foreign investment and the interest-rate gap between India and the US has also become less significant, according to the brokerage.
Instead, currency movements, relative market valuations and changes in forward earnings expectations have emerged as more important considerations for foreign investors.
The rupee has become a particularly significant factor. Bernstein said the correlation between FII flows and the Indian currency has risen above 70% in recent years. According to the brokerage, a weaker rupee can reduce the returns foreign investors receive when their investments are measured in US dollar terms.
High Valuations Could Also Weigh on FII Flows
Bernstein also pointed to India’s relatively high valuations as another challenge for attracting overseas capital. Its analysis suggests that periods of rising relative valuations have been associated with weaker FII flows in recent years.
The brokerage therefore believes foreign investors are not simply waiting for current uncertainties to disappear before returning to Indian markets. A sustained revival in foreign investment, it said, will depend on India developing a new generation of companies capable of competing successfully in global markets.
Disclaimer: This article is intended for general informational purposes and is based on the views and analysis attributed to Bernstein in the source material. Market conditions, investment flows and investor sentiment can change rapidly. The information should not be considered investment advice, and readers should conduct their own research before making financial or investment decisions.