Annual capital inflows dropped from $73B to projected -$5B by FY26. Kotak says outflows will persist unless India improves relative earnings growth.
Alpha Score of 46 reflects weak overall profile with moderate momentum, poor value, moderate quality, moderate sentiment.
Foreign portfolio investor (FPI) flows into Indian equities will likely stay muted in the near term, according to a Kotak Institutional Equities report. The brokerage points to a steady erosion of India's relative attractiveness versus other emerging markets, driven by three structural headwinds: weaker earnings growth, negative exposure to the AI and semiconductor cycle, and a vulnerability to rising commodity prices.
The report directly challenges any hope of a quick rebound. India's external capital dependency has become more visible over the past two years, and unless the country addresses its structural current account challenges and improves the relative earnings outlook, the pressure on foreign capital will persist.
“We expect FPI flows to stay muted, given India’s low attractiveness versus other EM markets,” the report states. The assessment is grounded in a comparison of earnings trajectories and sector exposures across emerging markets. Kotak identifies three reasons India falls short versus peers:
Other emerging markets currently offer stronger exposure to both the AI cycle and commodity cycles, making them more attractive destinations for global portfolio allocation.
“India’s external capital dependency has become more visible over the past two years,” Kotak writes, as a higher current account deficit has coincided with slowing net FDI and rising FPI outflows.
The numbers are stark. After running a capital account surplus of roughly $73 billion a year for five years (FY2019–FY2024), India’s annual inflow dropped to $17 billion in FY2025 and is expected to flip to a net outflow of -$5 billion in FY2026. That swing reflects a combination of portfolio selling and weakening foreign direct investment.
Net FDI inflows, a more stable source of external financing, plunged from $37 billion annually in FY2019–FY2023 to just $1 billion in FY2025. That drop is particularly concerning because FDI tends to be less volatile than portfolio flows and carries long-term commitment signals. The near-disappearance suggests global corporations are rethinking India’s manufacturing and service delivery economics relative to other Asian and Southeast Asian destinations.
| Metric | Period | Value |
|---|---|---|
| Annual capital inflows | FY2019–FY2024 avg | $73 billion |
| Annual capital inflows | FY2025 | $17 billion |
| Annual capital inflows (est.) | FY2026 | -$5 billion |
| Net FDI inflows | FY2019–FY2023 avg | $37 billion |
| Net FDI inflows | FY2025 | $1 billion |
Large and sustained FPI outflows are already visible. The MSCI India index has significantly lagged the broader MSCI Emerging Markets index since August 2024, a real-time signal that the allocation shift is already underway. Kotak notes the selling reflects “the steady deterioration of relative returns” – a mechanical outcome of compressing earnings expectations.
India’s current account deficit could widen further if crude oil prices stay elevated, adding balance-of-payments pressure that would compound the capital account weakness. Higher energy costs directly erode the trade balance and force the rupee to absorb more of the adjustment.
A wider CAD, combined with lower net capital flows, puts pressure on the rupee and may force the Reserve Bank of India into tighter monetary policy or reserve drawdowns. That feedback loop would further reduce the return on Indian equities for foreign investors.
Practical rule: When a country loses both its portfolio appeal and its FDI credibility, the currency and the equity risk premium tend to reprice together. India is entering that zone unless earnings expectations stabilize or the current account narrows.
For traders watching the India allocation trade, the Kotak report provides clear markers. A reversal in the relative earnings growth gap between India and other EMs would be the first positive signal. If Indian companies start reporting earnings upgrades while peers see downgrades, the valuation discount could narrow.
Second, a meaningful improvement in the AI and semiconductor exposure of Indian indices would take years of policy-driven investment. Even small announcements of fab capacity or data center investment could shift sentiment incrementally.
Third, a sustained decline in crude oil prices would reduce the CAD risk directly.
Until those signals appear, Kotak’s baseline of muted FPI flows is the most defensible scenario. India’s external capital flows are likely to remain a drag on equity market returns, and the relative underperformance versus other EMs may persist.
For context, MSCI Inc. (Alpha Score 46/100, Mixed), the provider of the indices that define these comparisons, operates in the Financial Services sector. Its stock analysis is available on the MSCI stock page. Broader market context can be found in our stock market analysis.
Prepared with AlphaScala research tooling and grounded in primary market data: live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.