FPI flows to remain subdued as India loses appeal versus EM peers: Kotak
New Delhi, May 26
Foreign portfolio investor flows into India are likely to remain muted in the near term as the country's relative attractiveness compared to other emerging markets weakens, according to a report by Kotak Institutional Equities.
The report flagged concerns over slowing capital inflows, rising current account pressures and weaker earnings outlook, saying India's external capital dependence has become increasingly visible over the past two years.
"We expect FPI flows to stay muted, given India's low attractiveness versus other EM markets," the report said.
According to the brokerage, India is facing a combination of "weaker relative FY2027E earnings growth in terms of quality and quantity," along with "negative exposure to the ongoing AI and semiconductor cycle" and "negative exposure to commodities, especially crude oil and natural gas."
The report added that other emerging markets currently offer stronger exposure to the artificial intelligence and commodity cycles, making them more attractive to global investors.
Kotak noted that "the continued large FPI outflows from Indian equity markets reflect the steady deterioration of relative returns amid continued compression of relative earnings growth expectations."
The report highlighted that India has already witnessed a sharp deterioration in capital account flows in recent years. Annual capital inflows, which averaged around USD 73 billion during FY2019-24, declined sharply to USD 17 billion in FY2025 and are expected to turn negative at around USD 5 billion in FY2026.
Net FDI inflows have also weakened significantly. The report said annual net FDI inflows fell from USD 37 billion during FY2019-23 to just USD 1 billion in FY2025.
Kotak further warned that India's current account deficit (CAD) could widen further due to elevated crude oil prices, putting additional pressure on the balance of payments.
"India's external capital dependency has become more visible over the past two years" as slowing net FDI flows and rising FPI outflows coincided with a higher current account deficit driven by global energy prices, the report said.
The brokerage also observed that India has underperformed several global and emerging markets over the past five years, while MSCI India has significantly lagged the broader MSCI Emerging Markets index since August 2024.
The report suggested that unless India addresses its structural current account challenges and improves its relative earnings outlook, foreign capital inflows may continue to remain under pressure.
— ANI
Reader Comments
Kotak's report is spot on. We've been riding high on valuations but fundamentals are weak. Rising crude prices, slowing earnings, and competition from other EMs like Vietnam and Indonesia - it's a perfect storm. The government needs to urgently address policy bottlenecks and improve ease of doing business.
Interesting perspective from an Indian brokerage. As someone tracking emerging markets, I've noticed India's underperformance since August 2024. The structural issues around current account deficit and FDI sustainability are real. The AI boom is benefiting Taiwan and Korea more than India right now. Things could improve if the government pushes semiconductor and AI investments.
Yeh sab toh theek hai, but let's not forget - FPI flows are volatile by nature. The real issue is we're not attracting enough FDI in manufacturing. Our labor laws and land acquisition costs are scaring away long-term investors. Fix those first. Plus, with crude above $80, our CAD will keep widening. Government ne kuch concrete karna padega.
As a foreign investor, I've been reducing my India allocation. Valuations are stretched relative to earnings growth potential. Indonesia and Mexico are offering better risk-reward right now. The Kotak report is realistic - until India improves its earnings quality and addresses structural issues, capital flows will remain under pressure.
While the report is correct about short-term challenges, let's not be too pessimistic. India's demographic dividend and domestic consumption story are still strong. Once global interest rates come down and commodity prices stabilize, FPI flows could return. We just need better policy coordination and fiscal discipline. Rome wasn't built in a day! 😊
We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.