FIIs Unlikely to Return to Indian Equities Soon: Yes Securities
Quick Look
- Foreign institutional investors (FIIs) are unlikely to return to Indian equities soon due to modest dollar returns, the AI revolution favoring other markets, and tax changes.
- A comeback may occur if valuations hit rock bottom, IPO activity surges, or global markets overheat.
AI-generated summary
Why It Matters
Foreign institutional investors (FIIs) have shown declining interest in Indian equities since the 2008 financial crisis. Factors such as modest dollar returns, rupee depreciation, and the rise of AI-native growth stories in other markets have made India less attractive. Recent tax policy changes have further impacted market appeal.
Foreign institutional investors (FIIs) are unlikely to return to Indian equities soon due to structural and cyclical forces, including modest dollar returns and the AI revolution favoring other markets. FIIs may only re-enter if valuations hit rock bottom, IPO activity surges, or global markets become overheated, making India an attractive diversification option.
Foreign Institutional Investors (FIIs) might come back in a big way under three scenarios: when valuations hit rock bottom, when there's a significant uptick in IPO activity, or when global markets are too hot, making India a tempting option for diversification
Foreign institutional investors (FIIs) are unlikely to make a strong comeback to Indian equities anytime soon, according to Amar K Ambani, Executive Director at Yes Securities. Speaking at the firm's flagship investor conference, Ambani laid out a case for why structural and cyclical forces continue to push global capital away from India.
The long decline of FII interest in India
Ambani traced FII skepticism back further than most, not to the AI boom, but to the 2008 global financial crisis. "The kind of money that used to flow in as a percentage of market cap during 2003 to 2007-2008, that kind of money has never come through in Indian equities from 2008-2009 onwards," he said.
Foreign investors have had few compelling reasons to prefer India. Returns in dollar terms have been modest, the rupee has steadily depreciated, and the Magnificent Seven US tech stocks delivered outsized gains that made India look pedestrian.
The AI revolution has now added a new layer to this skepticism. Global funds increasingly view India as an "old economy" market, one that lacks the AI-native growth stories available in the US, Taiwan, and South Korea. "That is where the money is going right now," Ambani noted.
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Taxation changes have also played a role. Policy shifts around F&O taxation, GAAR rules, and the removal of treaty benefits for Mauritius-based investors have made Indian markets less attractive on a post-tax basis.
What could bring FIIs back?
FIIs may return aggressively under three conditions: if valuations become extremely cheap, if IPO activity revives strongly, or if overheated global markets make India an attractive diversification bet. Until then, Ambani sees no major structural trigger for strong inflows.
Earnings growth revised down
On the domestic earnings front, the outlook has also softened. What began the year as an expectation of 15% earnings growth has moderated to roughly 10–12% for the year ahead. While Q3 results were broadly better than feared, non-financial companies saw approximately 14–15% year-on-year revenue and operating profit growth, headwinds are building. Rising inflation, questions around consumption demand, and higher yields globally are all likely to cap upside.
Capex cycle: Selective, not broad-based
India has not yet entered a full-fledged private capital expenditure cycle, Ambani cautioned. Capacity utilization, hovering around 74–75%, hasn't hit the 80% threshold that typically triggers widespread new investment. However, pockets of strength exist. Power, renewables, capital goods, real estate, and energy refining have seen active investment flows — and that is expected to continue.
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IT sector: Underweight, not a value trade yet
On information technology, Ambani was measured in his pessimism. Yes Securities has held an underweight position for some time, a call that has played out as valuations corrected. But he stopped short of calling it a value trade yet.
Questions remain about whether IT firms will need the same workforce scale and whether they can command premium pricing as AI implementation partners rather than traditional services vendors.
Midcap and smallcap players may navigate the transition more nimbly than large-cap incumbents, though Ambani noted the majors will eventually adapt — drawing a parallel to how Bajaj and TVS responded to the EV challenge from two-wheeler startups.
Defence and power: Long-term conviction
Two sectors drew clear long-term bullishness. Defence spending is rising as geopolitical tensions force every country to invest in modern warfare capabilities, from drone technology to remote strike systems, making defence manufacturing a durable multi-year theme.
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The power sector stands out for its AI and data centre tailwinds. Ambani cited Virginia in the US, where data centres account for 25% of power consumption, against a global norm of 2–3%. As India builds out its data centre infrastructure, power demand is set to surge, driven by AI workloads, electric vehicles, and broad electrification, benefiting a handful of well-known listed names.
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What to Watch
AI outlook — possibilities, not facts
FIIs may return to Indian equities if valuations hit rock bottom.
Possible · Medium term
FIIs may return to Indian equities if IPO activity surges.
Possible · Medium term
FIIs may return to Indian equities if global markets become overheated.
Possible · Medium term
Open Questions
- What specific tax policy changes have most significantly deterred FIIs?
- What is the projected timeline for India to develop more AI-native growth stories?
- How will the current domestic earnings growth of 10-12% impact market performance without strong FII inflows?
- What specific triggers could lead to valuations hitting 'rock bottom' in the Indian market?
