Despite India's rapid economic growth, this growth is not reflected in the sentiment of foreign investors. Even with strong GDP growth in the country, Foreign Institutional Investors (FIIs) are not investing in the Indian stock market in the same volumes. Over the last two years, about $40 billion has been withdrawn from Indian stocks (equivalent to 3.84 lakh crore rupees).
According to a report by the brokerage firm Bernstein Research dated September 21, 2026, some old factors that attracted foreign investment to India have lost their former significance. This means that rapid economic growth alone is no longer sufficient to attract the attention of foreign investors.
The stance of FIIs, which represent large foreign funds and institutional investors, has changed significantly. According to Bernstein, the net outflow of FII funds over the last 24 months amounted to about $56.3 billion, while inflows during the same period reached $38.6 billion. Thus, more money has left the Indian stock market than has entered over the past two years.
Looking at the picture over the last 10 years, the net volume of FII investments in the Indian stock market was only about $4 billion. In comparison, Domestic Institutional Investors invested about $300 billion. This demonstrates the growing role of local investors in the Indian market as the contribution of foreign participants weakens.
Once, India's economic growth and foreign investor sentiment went hand in hand: as India's GDP accelerated, foreign investments also grew. However, according to Bernstein, this link was quite strong until around 2007, after which it began to weaken. In recent years, the situation is such that despite the stable dynamics of the Indian economy, FII funds continue to be withdrawn from the country. This indicates that foreign investors make investment decisions based not only on India's economic growth.
The difference in interest rates between India and the US also plays an important role in the decisions of foreign investors. Between 2012 and 2018, there was a close correlation between this rate differential and FII investments. However, this relationship has weakened over the last 4-5 years. Now, the movement of the rupee against the dollar is becoming more critical for foreign investors. Bernstein notes that in the recent period, the correlation between FII inflows and the movement of the rupee was about 72.9 percent.
Simply put, if a foreign investor invests money in India, and the price of the Indian stock rises, but at the same time the rupee depreciates against the dollar, their return may decrease upon converting the profit back into dollars. Consequently, the success of an investor in the Indian market depends not only on stock price growth but also on the movement of the rupee and dollar exchange rates.
Foreign investor concerns are not limited to currency rates; market valuation is also a serious issue. Valuation refers to how expensive or cheap a stock or the entire market is assessed relative to its earnings. Bernstein reports that after 2020, India's valuation consistently remained higher than that of other emerging markets. From December 2023 to September 2026, India's average relative valuation was 162 percent. During this same period, the net FII outflow amounted to about $44 billion, coinciding with the period when India appeared more expensive than other emerging markets, and investors continued to withdraw their funds.
Bernstein predicts that over the next 12 months, FII inflows may remain stable or show slight growth. That is, no immediate large-scale injection of funds into Indian stocks by foreign investors is expected. According to the report, some foreign investment may return if crude oil prices stabilize, corporate profits improve, and other economic indicators improve. Nevertheless, to ensure a sustainable return of foreign investment in the long term, rapid market or GDP growth alone will not be enough.
Bernstein emphasized that to ensure a strong inflow of foreign capital in the long term, globally competitive companies in specific sectors where India can play a more significant role are necessary. These areas include semiconductors, batteries and energy storage, space, defense, and deep technology. Simply put, although the Indian economy is growing, foreign investors now need to consider not only GDP growth but also rupee stability, market valuation, corporate profitability, and future business opportunities.
