Foreigners Ditch Indian Stocks as Outflows Near Historic High

(Bloomberg) --

Global investors are pulling back from Indian equities at a frantic pace, setting the stage for what may be the largest foreign outflows in history this year.

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A cocktail of punitive US tariffs, weak earnings, and some of the world’s priciest valuations has soured sentiment, prompting overseas funds to yank a net $17 billion from Indian shares this year through Sept. 26 — closing in on the record set in 2022, data compiled by Bloomberg show. The exodus continued at the start of the week, with provisional data pointing to another $230 million outflow on Monday alone.

It wasn’t supposed to unfold this way. India was among the first major markets to rebound after US President Donald Trump announced global tariffs in April, drawing investors who saw the nation as a safe spot amid trade tensions. Instead, as other countries agreed to deals, the US slapped a 50% tariff on Indian goods — the steepest in Asia — and sharply raised H-1B visa fees. Few expect a reversal in foreign flows anytime soon.

“I doubt foreign flows would snap back in the near term,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. For a durable reversal, investors need: clarity on US trade and immigration policy, a stable rupee, and evidence that earnings can justify the valuations that Indian stocks carry, she said.

Tariffs are not the only threat. Slowing economic growth and persistently weak corporate earnings have also weighed on sentiment. Profits for Indian companies in the MSCI gauge are estimated to rise just 5% in 2025, down from 8% last year, according to Bloomberg Intelligence.

The foreign fund exodus has spilled into the currency market, dragging the rupee lower and eroding the appeal of local assets. The currency has fallen 3.6% versus the dollar in 2025, hitting a record low of 88.8050 per dollar on Tuesday.

The pressure is evident in equities, where the selloff has pushed the NSE Nifty 50 Index into a rare spell of underperformance against regional peers. The benchmark has lagged the MSCI Asia Pacific Index for five straight months through September — the longest streak since 2013. Yet even after this, Indian stocks remain among the most expensive in the region, with Nifty trading close to 20 times 12-month forward earnings.

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There’s one silver lining: domestic institutions. Mutual funds and insurance firms have been snapping up stocks at a record pace, pouring $66 billion this year and helping cushion some of the damage from foreign capital outflows.

Still, global funds have shown renewed appetite for Indian debt amid higher yields in the bond market. Foreign holdings of index-eligible sovereign debt rose by 83.3 billion rupees ($940 million) in September, the third straight monthly increase, according to clearing house data.

Some investors remain optimistic, noting that India’s valuation premium over Asian peers has shrunk to its lowest in more than two years. Only weeks ago, a Bank of America Corp. survey showed more regional fund managers overweight Indian stocks than underweight, while HSBC Research suggested the market might be nearing an inflection point.

“Ongoing trade negotiations, improved relations with neighboring countries, and a narrowing relative valuation premium is making this an interesting entry point for global investors,” said Rajiv Nihalani, an emerging market investment specialist at Amundi UK Ltd.

The Nifty is up about 4% for the year and on track for its 10th straight annual gain thanks to relentless buying by local investors. Still, hopes for a late-year rally — fueled by recent cuts in consumption taxes and positive signals from the government — have evaporated among global funds.

Foreign investors remain wary about India equities due to concerns over US tariffs, weak corporate investment, political risks from state elections, and capital gains tax, IIFL Capital strategists wrote in a note on Tuesday, citing a roadshow in Europe.

--With assistance from Malavika Kaur Makol and Bhaskar Dutta.

(Updates with India bond flows data in ninth paragraph.)

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