Muted earnings, premium valuations, currency weakness, relatively attractive emerging market (EM) peers, and India’s limited participation in the global AI value chain have reduced the country's appeal for foreign portfolio investors (FPIs), says Arbind Maheswari, head of India equities at BofA Securities, in an interview with Mint. While global investors remain cautious, domestic flows will continue to support the country's market activity, he says. Edited excerpts of the interview:
What is driving the outflows of FIIs?
If we take a step back, in the post-covid recovery phase, India seemed like the only large emerging market that had a story to tell. And that continued on for nearly three-four years. There was strong visibility on earnings backed by domestic demand resilience, consistent domestic fund inflows and tailwind from supply chain diversification, which was the China plus one theme. So, the market had multiple positive factors going for it and there was really no other competition in the emerging market space.
However, over the past two years, this perception has weakened. Muted earnings delivery, premium valuations, currency weakness, relatively attractive valuations across other EMs, and India’s limited participation in the global AI value chain—both hardware and software—have reduced India’s appeal to FPIs. Consequently, FII flows recorded the highest ever outflow of $13 billion in March 2026, a sharp reversal from an inflow of $2.4 billion in February 2026; FII flows show the continued trend in April, tracking at $4 billion month-to-date.
But domestic flows have been holding up. Thoughts?
Yes. We have been reasonably okay because we had the buffer from the domestic flow, which has been a big constant. The structural bid from SIPs has turned corrections into shallow, shorter-lived drawdowns, rather than trend breaks. Despite $19 billion in FPI equity outflows YTD, domestic institutions have held the line, supported by $3-3.5 billion SIP inflows each month. FIIs used India as the funding market and rotated into high AI-correlation markets like Korea, Taiwan. While domestic flows don’t fully replace FPIs in driving re-rating, they have put a strong floor under valuations.
How is the West Asia crisis affecting foreign flows?
Like all major economies, the West Asia crisis has had an impact on India. Uncertainty triggered by the escalation has raised worries on GDP growth, inflation, fiscal and current account deficit. All this reflected in the sell-off we saw in India.
The surge in crude and supply chain disruptions pushed global investors into risk-off mode, leading to broad EM equity selling rather than India-specific exits. Some may argue that Indian markets and the currency fell going into this event as well, and now we are falling in line with the others. Until geopolitics settle and crude volatility eases, foreign flows are likely to remain cautious even as domestic capital continues to provide downside protection.
And where do we go from here?
It all depends on how quickly the West Asia crisis resolves. If this truce were to hold and a deal is struck, it will be a big relief. We still have to be mindful that the physical supply for some of these commodities may not come back to normalcy very quickly. However, people will start looking forward and give the benefit of doubt, and we could see some growth numbers start to coil back up.
When we started the year, our Nifty earnings growth estimates were at about 14% and we have cut that down to 8.5% once the Middle East crisis started. If this were truly the end of the Middle East crisis, there is hopefully an upside to that number. We should be then talking double digit earnings growth and with some valuation upside added, we could be looking at double digit market returns from here as well.
When do we see primary market activity coming back?
Primary market activity is built on the shoulders of a stable and positive secondary market performance. While the pipeline of deals is still quite strong, the current risk-off sentiment and lack of predictability in the market has pushed out timelines for some of these transactions.
Don’t expect primary markets to re-open with a bang; they will likely creep back up once volatility compresses. When markets are steady and rising, investors start looking for investable ideas at scale. IPOs, QIPs, block deals are then an easy sell for capital that is looking to get deployed at reasonable valuations.
As markets stabilize, we expect primary markets to start seeing some traction in Q2 (July-September). It could start with some secondary blocks and QIPs which are faster in terms of time to market, followed by IPOs in the second half of the year.