India's valuation premium has decreased significantly from its peak in 2024, even as competing emerging markets experience a strong resurgence. This raises a crucial question for foreign investors: Is India now becoming fairly valued again?
In 2025, Foreign Institutional Investor (FII) investment in India took a sharply negative turn. Since July 2025, FIIs have sold off over ₹1 lakh crore of Indian equities, causing their share of India's total market capitalization to plummet to roughly 17%, a level not seen in 15 years. This shift has prompted questions about the reasons behind FII selling and their departure from India, despite the country's stable domestic economic outlook.
Several factors are contributing to this FII exodus. One key reason is that earnings growth is stronger in other markets. While Indian companies continue to expand, their earnings haven't kept pace with those of other major markets. Currency pressure also plays a role, as the depreciating rupee reduces USD returns for foreign investors. Even when Indian stocks perform well, weaker dollar-adjusted returns during periods of currency volatility make India less appealing.
Furthermore, higher U.S. yields are drawing capital away from India. With elevated U.S. interest rates throughout 2024-25, global funds have discovered attractive, low-risk yield opportunities abroad. India's growth themes, while robust, remain largely domestic, with consumption, manufacturing, and financial services primarily driven by local factors.
According to the Economic Survey for 2025-26, India's strongest macroeconomic performance in decades has clashed with a global system that no longer rewards such success with currency stability, capital inflows, or strategic insulation. Despite upgrading the economy's potential growth rate to 7% from 6.5% three years prior and projecting growth of 6.8-7.2% in the next financial year, Chief Economic Advisor V Anantha Nageswaran expressed concern about the global capital strike and its adverse impact on the rupee's stability. Nageswaran views India as a "victim of geopolitics," asserting that the rupee's valuation doesn't accurately reflect India's strong economic fundamentals, causing investor hesitation.
To regain FII interest, analysts believe three key conditions must align: rupee stability, improving corporate earnings, and more reasonable market valuations. While retail investors have provided support to Indian markets, the next major catalyst for foreign flows hinges on currency stability and earnings recovery in the coming quarters. In the third quarter of FY26, FIIs selectively purchased stocks in the Indian market, even while remaining net sellers overall.
