FIIs Pull $40 Billion From India In Two Years, Know- What Is Keeping Foreign Money Away?

Mumbai: Foreign institutional investors (FIIs) have pulled around USD 40 billion from Indian equities over the past two years, even as the economy continued to expand strongly, signalling a deeper shift in how global investors view the Indian market.

A September 21 Bernstein report, 'India Strategy: When will FIIs return?', suggests that traditional triggers such as GDP growth and interest-rate differentials are losing their influence over foreign flows.

Domestic Money Takes Charge

The divergence between foreign and domestic investors has widened sharply. Over the past decade, FIIs have net invested only around USD 4 billion in Indian equities, while domestic institutional investors (DIIs) pumped in nearly USD 300 billion.

Bernstein said combined FII outflows during the latest 24-month period stood at USD 56.3 billion, a dramatic reversal from inflows of USD 38.6 billion in the preceding 24 months.

Growth No Longer Enough

Historically, stronger Indian economic growth attracted overseas capital. However, Bernstein said the relationship between GDP growth and FII flows has weakened considerably, with the recent correlation turning negative.

A similar breakdown has emerged with interest rates. The India-US rate differential tracked foreign flows relatively closely between 2012 and 2018, but that relationship has faded over the past four to five years.

Rupee Becomes Key Trigger

Currency movements are now playing a bigger role. Bernstein found that the correlation between FII flows and rupee movements against the US dollar reached 72.9% in the latest period analysed.

A weakening rupee can erode returns for dollar-based investors, even when Indian equities deliver gains in local currency.

Valuation Wall Remains

Expensive valuations are another hurdle. Between December 2023 and September 2026, India's average relative valuation stood at 162%, while net FII flows were negative at around USD 44 billion.

Bernstein expects FII flows over the next 12 months to remain flat to modestly positive. A durable revival, however, could depend on India building globally competitive businesses across semiconductors, batteries, energy storage, defence, space and deep-tech.