Overseas investors are turning sellers of Indian assets again as surging oil prices and rising global yields threaten to derail a recent revival in demand.
The renewed selling is snuffing out a nascent recovery in foreign demand following an unprecedented stretch of underperformance by Indian stocks against regional peers. Even so, higher global yields are making it hard for India to attract overseas capital as investors pull away from most emerging markets. Equity valuations add to the challenge. With developed-market yields elevated, investors are demanding stronger earnings growth to justify that premium.
Foreign funds have yanked more than $45 billion from Indian stocks since the end of 2024, partly as money flowed toward northern Asian markets with exposure to the artificial intelligence trade. MSCI Inc’s broader gauge of Indian equities still trades a premium to Asian equities despite heading for its worst year since 2011. Earnings for the 160-plus member gauge are expected to climb 13% in 2027, the slowest among major peers including China, South Korea and Taiwan.
“The recent foreign selling should be viewed primarily in the context of the broader global bond-market correction, rather than as a fundamental reassessment of India,” said Fesa Wibawa, investment manager of fixed income Asia at Aberdeen Investments. The pullback offers an opportunity to gradually increase exposure, he said. “Though India’s macro buffers have increased with FCNR flows, capital-flight risks have also risen with rate hikes in developed markets,” Kunal Vohra, strategist at BNP Paribas SA wrote in a note this week. “Rising oil prices and commodity inflation remain a material challenge for India in the near term.”
Resurgent oil prices are weighing on the rupee and stoking inflation in an economy heavily reliant on imports, leaving policymakers with limited scope to cushion markets despite a series of earlier measures to attract foreign capital.
The bank expects Indian stocks to remain range-bound in the near term, with valuations, share supply and high oil prices likely to limit the scope for gains. Policymakers have also taken steps to support the rupee. Still, the central bank has been selling dollars to support the rupee as elevated energy prices weigh on the currency. Rupee weakness and the cost of hedging against further declines also erode dollar returns on Indian assets. Meanwhile, rising bets on interest-rate hikes by the central bank are adding to unease over the growth outlook for both bond and stock investors.
Because uS-based investors account for the largest pool of foreign portfolio equity assets, the higher returns available on Treasuries are particularly relevant for India. Banks garnered $133 billion from a special diaspora program. The dollars have been swapped with the Reserve Bank of India, which briefly pushed up reserves to a record $785.7 billion.
“Oil will be the biggest factor determining whether India sees renewed foreign outflows,” said Gautam Chhaochharia, head of global markets India at UBS Group AG.
