'Not entitled' to FII flows — experts see low scope of trend reversal in 1-2 quarters

Foreign institutional investors (FIIs) have continued selling Indian stocks, driven by concerns over high valuations relative to earnings growth and cyclical economic risks. P. Krishnan, Managing Director and CIO at Spark Asia Impact Managers, notes that FIIs have been net sellers since the post-COVID recovery, with persistent outflows even before the recent Iran war. Poor earnings growth and India’s high valuations compared to other emerging markets (EMs) have heightened skepticism, despite the country’s long-term growth prospects. The current Middle East crisis exacerbates India’s vulnerabilities, particularly its reliance on imported energy, while the Indian rupee (INR) has weakened further. A CNI InfoXchange report projects India’s equity performance through 2028 as a battle between domestic strength and global headwinds, with GDP growth expected at 6.5-7.2% but Nifty’s 12-15% CAGR dependent on navigating oil shocks, Fed-BoJ policy divergence, and monsoon risks. Forward valuations (Nifty P/E ~19.5x) already reflect optimism, leaving headline risks as the primary driver of market movements. Experts see minimal chance of a reversal in FII flows in the next 1-2 quarters, though selling pressure may ease if macroeconomic conditions stabilize. A potential shift in FII sentiment could occur if India mitigates war-related costs, signals strong capital protections through structural reforms, and allows valuations to correct naturally. Krishnan warns against an 'entitlement bias'—the assumption that India is inherently deserving of FII inflows—stressing that tax incentives alone cannot sustain foreign capital without deeper structural improvements. FIIs remain unimpressed by domestic retail investor buying, citing past examples where speculative narratives without strong fundamentals led to market downturns in regions like Japan, Taiwan, Southeast Asia, Latin America, and China. Krishnan describes FIIs as 'patient sellers,' prioritizing disciplined investment over short-term market trends. Domestic investors, however, often misunderstand this approach, expecting immediate mean reversion rather than long-term fundamentals to drive recovery.