India has moved from being one of the most popular emerging markets to among the most unloved. Why?
It’s a confluence of factors that’s played out against India since September 2024, when the foreign selling and the resultant market weakness started. It started with profits coming under pressure in 2024, followed by Donald Trump’s tariff onslaught, growing popularity of other markets in the region-mainly South Korea and Taiwan-driven by the AI boom, and more recently, the heady mix of rising oil prices and the falling rupee.
As global investors chase faster-growing markets, India’s diversified economy is struggling to justify premium valuations amid relatively slower earnings growth
Wait. Wasn’t India supposed to have the TINA factor? There Is No Alternative was one of the biggest selling points for India for years, and the country’s ever-optimistic sell side backed that narrative with one strong argument: Earnings growth. For global fund managers, elevated valuations were forgivable as earnings growth was strong. But as earnings growth slowed in 2024, investors started asking: Why pay top dollar for India when markets such as Korea and Taiwan were cheaper and riding an AI boom?
Add in expensive oil and the wobbly rupee that had the worst year in 14 in FY26, and the TINA plank is demonstrably shaky. In short, India is not the only game in town. But aren’t Korea and Taiwan basically riding an AI wave driven by just a handful of tech companies? How can that be compared to India’s broader economy? Global investors are not chasing diversification; they are chasing the strongest earnings momentum. In markets like Korea and Taiwan, a handful of semiconductor and technology giants, which sit at the heart of the global AI supply chain, are delivering that. Investors are aware of the concentration risks, but they don’t mind as long as profits keep rolling. India’s story is far more diversified across banks, consumption, telecom and manufacturing, but it currently lacks a strong earnings engine of semiconductor companies. That’s why global investors are asking: why pay significantly more for slower growth?
How long can this trend continue? History says these supercycles last longer than anyone predicts. Right now, the hot EM trade among global trading desks is: Long Korea/Taiwan, Short India. Just like India, Korea also imports oil, but its semiconductor boom more than offsets the pain. India doesn’t have that cushion, and the weaker rupee is showing it.
So, how long does this foreign cold shoulder last? From conversations with global strategists, it’s clear that India does not figure in the list of investors’ top allocations for now. These factors will be key for India regaining its popularity: slowdown in the global AI trade, oil price decline, sustained rebound in the rupee and most importantly, earnings revival. For now, a consistent drop in foreign portfolio selling itself will be good news.
And when does this exodus stop? Predicting flows has always been a tricky issue for global market watchers. Yet, if a combination of the extent of outflows and foreign ownership were to go by, the odds seem higher than selling should slow hereon. Goldman Sachs’ strategists said after a record $22-billion outflow in 2026, the likelihood of incremental foreign selling could be limited to about $4-5 billion. Since September 2024, foreigners have pulled out $53 billion.
How do investors navigate this situation? Simplistically put, investors may be better off looking at pockets with lower foreign ownership. That’s why bluechips, where overseas investors are most active, are still trudging along, while mid- and small-caps, powered by India’s retail army, continue to sprint ahead, expensive valuations or not.
