Foreign investors have spent much of this year cutting exposure to Indian equities, diverting some capital to Taiwan and South Korea amid an AI-driven rally and robust semiconductor earnings. However, recent selling in those East Asian markets has brought the conversation surrounding foreign flows back to India.
Current picture
According to Bloomberg data, Foreign portfolio investors have pulled nearly $23.4 billion from Indian equities so far this year, driven by stretched valuations, rupee weakness and softer earnings growth expectations. This sustained selling, coupled with a rising current account deficit, has severely weakened the rupee
But the flow picture across Asia is signaling some shifts. South Korea and Taiwan, which had become favourite markets for global investors riding the artificial intelligence and semiconductor boom, have started seeing large outflows. So far this week, overseas investors have pulled out over $7.8 billion from South Korean equities and over $4.3 billion from Taiwan, according to Bloomberg. This marks the fourth consecutive week of outflows from South Korea and the second straight week of selling in Taiwan.
For India, the timing is important. While FPIs have remained heavy sellers for most of the year, Indian equities have seen inflows of around ₹194million in the week so far. Though modest compared to earlier outflows, the reversal sparks hope. Is this the start of a decisive foreign capital rotation back to India, or will a weak rupee and macro headwinds keep a lid on FPI inflows?
Experts take
While it's too early to predict, V.K. Vijayakumar, chief investment strategist at Geojit Investments, highlights that the outflows from South Korea and Taiwan reflect concerns over rich valuations after the sharp AI-led rally. “There are concerns about their high valuations. Many experts believe that the AI bubble can burst since valuations are difficult to sustain. Partly, it is profit booking too,” he said, adding that the spike in global bond yields is another negative factor for equities.
The scale of the rally suggests why investors may be reassessing the trade. South Korea’s Kospi has been the best performing major large-market index in the world over the past one year, with a return of 177%, while Taiwan’s Taiex has delivered an 86% return. “Both markets benefited from the booming AI trade, led by companies such as Samsung and SK Hynix in South Korea and TSMC in Taiwan,” said Vijayakumar.
On the other hand, Seshadri Sen, head of research at Emkay Global Financial Services, said that India can attract FPI inflows, but for that the energy crisis has to subside. At $100-110 crude, there are multiple stress points on the Indian economy and risks of earnings downgrades. Once oil prices come down meaningfully, possibly towards $80, FPIs should come back to India.
India’s valuation comfort
Valuations suggest that the trade has become more nuanced. The Nifty 50 is trading at a forward price-to-earnings (PE) multiple of 16.2 times, lower than its current PE of 19.6 times and below its 10-year average PE of 20.7 times, according to Bloomberg data. This indicates that India’s valuation discomfort has eased compared with its own history.
In comparison, South Korea’s Kospi trades at a much lower forward PE of 6.8 times, but its current PE of 18.6 times is significantly above its 10-year average of 11.6 times. Taiwan’s Taiex trades at a forward PE of 16.1 times, almost similar to Nifty, but its current PE of 26.9 times is sharply above its 10-year average of 15.9 times.
“The correction in the South Korean and Taiwanese markets and the FII outflows from these markets can turn out to be good for India. Since India is now fairly valued, there are sectors which can attract FPI inflows,” Vijayakumar said. However, he added that macro headwinds would constrain large foreign inflows.
Experts believe that the frenetic investment into AI will take a pause at some stage because of valuations or earnings uncertainty, but whether this will trigger a decisive rotation of foreign flows back into India remains to be seen.
Abhinaba Saha also contributed to this copy