Foreign capital continues to withdraw, with the cumulative net investment in the Indian stock market falling to the lowest level in nearly ten years.

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As foreign capital continues to sell off, the attractiveness of India's stock market has sharply declined. This market, once ranked among the world's top five, is now under pressure from structural capital outflows.

According to Bloomberg, as of June 1, the cumulative net investment by Foreign Portfolio Investors (FPI) in Indian stocks has dropped to 7.3 trillion rupees, the lowest since 2016. This statistic dates back to 1993 and covers inflows and outflows in subsequent years.

India's stock market was once hailed as a star among emerging markets, but its halo is now fading. On one hand, the oil price shock triggered by the US-Iran conflict has dampened India's economic growth prospects. On the other hand, global capital is accelerating its flow into economies related to artificial intelligence infrastructure. As a result, the market capitalization of South Korea's stock market has surpassed $5 trillion, overtaking India and ranking sixth globally.

Bank of America has previously warned that the trend of foreign capital withdrawing from India will likely persist through 2027.

Growth Expectations Under Pressure,India Misses Out on AI Cycle Dividends

Kotak Institutional Equities strategist Sanjeev Prasad and others wrote in a recent report: “Given India's relatively low attractiveness compared to other emerging markets, FPI inflows are expected to remain sluggish.” They pointed out that India's recent profit growth is expected to lag behind peer economies in emerging markets dominated by commodities and technology, and that India has virtually no exposure to the AI and semiconductor cycle, which could last one to three years.

Carson Block, founder of investment research firm Muddy Waters Capital, said last week that AI could replace as much as 15% of high-paid knowledge workers in the US in the coming years, a trend that may have a significant impact on India's economy. India’s economy relies heavily on exports of knowledge-based services to the US, and such forecasts have exacerbated concerns about India’s medium-term growth prospects.

Domestic Capital Takes Over from Foreign Capital

JM Financial Institutional Securities strategist Venkatesh Balasubramaniam pointed out in a report that the proportion of global funds held in Indian listed companies has fallen from nearly 20% a decade ago to 15% now. At the same time, driven by the continued and stable inflow of retail capital, the proportion held by domestic mutual funds has risen to about 20%, surpassing foreign capital for the first time.

This structural shift indicates that pricing power in India's stock market is gradually transferring from foreign institutions to domestic capital. Although continuous inflows of domestic capital provide some support for the market, the systematic withdrawal of foreign capital still poses persistent pressure on market valuation and liquidity, and may further affect India's relative position in global asset allocation.

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