Author: Aditya Pareek | EQMint | Market News
India’s equity markets may soon witness a shift in foreign investor sentiment as valuations undergo a healthy reset, according to market expert Manishi Raychaudhuri. After months of scaled-back foreign flows and rising concerns over overheated prices in several pockets of the market, Raychaudhuri believes India could once again turn into a preferred destination for global institutional capital.
Foreign Institutional Investors (FIIs) have been cautious through most of the year, trimming exposure in high-valuation segments, rotating toward cheaper emerging markets, and reacting to global macro uncertainties. However, as Raychaudhuri points out, the sharp correction in mid- and small-cap valuations and a cooling off in several momentum-driven stocks have set the stage for renewed interest.
The core of his argument is simple: India didn’t have a fundamental problem — it had a valuation problem. And that is now beginning to correct.
Over the past few years, India emerged as one of the world’s most expensive equity markets, driven by strong domestic inflows, robust earnings, and a surge of retail participation. But the valuations, particularly in pockets of consumption, financial services, and new-age sectors, had reached levels that made FIIs hesitant to add meaningful positions.
Raychaudhuri notes that this valuation premium was not entirely unjustified. India’s growth visibility, demographic strength, structural reforms, and relative macro stability continue to outperform many global peers. However, foreign investors typically compare markets on a risk-reward basis. With several emerging markets offering cheaper entry points and higher short-term yields, India’s premium became a sticking point — until now.
The recent correction across broader markets may be a turning point. Many mid-caps that were trading at stretched price-to-earnings ratios have seen meaningful drawdowns, while large-caps have remained comparatively stable. This rebalancing, Raychaudhuri argues, makes India more aligned with fair value. When a market corrects without a deterioration in fundamentals, long-term investors see it as an opportunity.
Another factor influencing a potential FII comeback is earnings growth. India remains one of the few large economies expected to deliver consistent mid- to high-single-digit GDP growth over the next few years. Corporate earnings have also held up well, with leading sectors like financials, industrials, auto, defence, and manufacturing showing strong visibility.
FIIs, who typically seek earnings stability and cyclical opportunities, may find India’s current setup appealing: stable demand, improving corporate balance sheets, and a government push toward infrastructure and manufacturing are creating multi-year growth avenues.
Raychaudhuri also highlights that the global liquidity environment is shifting. With major central banks signalling a potential moderation in interest rates, risk assets are likely to see broader support. When global liquidity improves, emerging markets with strong fundamentals — like India — tend to benefit disproportionately.
The domestic market structure also plays a critical role. For the first time in decades, local institutions and retail participants have been able to offset large bouts of foreign selling. This has helped maintain market resilience and reduce volatility. FIIs prefer markets that demonstrate such internal strength because it improves the ease of entry and exit.
However, Raychaudhuri cautions that this resurgence will not be uniform. FIIs may selectively increase exposure in specific sectors rather than broadly across the market. High-quality banks, capital goods, industrials, energy, and manufacturing-linked companies may see renewed inflows. Meanwhile, overstretched or story-driven pockets may continue to face pressure.
Another interesting trend is the increasing global appetite for India’s long-term structural themes — digitisation, formalisation of the economy, energy transition, and manufacturing revival. FIIs want exposure to sectors that benefit from multi-decade reforms, not just short-term rallies.
Despite the optimism, Raychaudhuri warns that risks still remain. Global markets continue to be sensitive to geopolitical uncertainty, supply chain disruptions, currency volatility, and fluctuating commodity prices. A sustained FII comeback will depend not just on valuations, but also on global risk appetite and stability in interest-rate expectations.
Nevertheless, the larger takeaway is clear: India is entering a healthier valuation phase, one that favours high-quality investors rather than speculative participation. Corrections have created opportunities, and fundamentals remain intact — a combination foreign investors rarely ignore.
If Raychaudhuri’s assessment holds true, the next few quarters may see gradual but steady FII inflows returning to Indian markets. For domestic investors, this could mean higher liquidity, stronger price support for quality stocks, and renewed leadership from institutional-backed sectors.
In essence, India’s valuation reset is not a sign of weakness — it may be the foundation for the next wave of institutional participation. And if that wave builds momentum, the market could be setting the stage for a more balanced, stable, and globally-backed bull cycle ahead.
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Disclaimer: This article is based on information available from public sources. It has not been reported by EQMint journalists. EQMint has compiled and presented the content for informational purposes only and does not guarantee its accuracy or completeness. Readers are advised to verify details independently before relying on them.
