Foreign Flows Freeze: Is Relief In Sight For Indian Markets?

India’s equity markets have been stuck in a narrow 25,000–26,000 range on the Nifty for over a year. With this lateral move, however, the valuations are quite high at approximately 20 times forward earnings, particularly in relation to the other emerging markets.

According to H. Nemkumar, Chief Growth Officer at IIFL Capital, the key reason is not macro uncertainty but a prolonged earnings downgrade cycle that began in late 2024.

Over decades, he argues, earnings upgrades and downgrades have been the most consistent drivers of valuations and capital flows. They have been a stronger driver than gross domestic product (GDP) growth or headline macro developments.

Why Have FIIs Been Selling?

In 2025, foreign institutional investors (FIIs) were net sellers of Indian equities worth ₹1,66,283 crore. This was the highest annual outflow ever recorded in the Indian capital market.

Foreign portfolio outflows are less about geopolitics and more about relative earnings momentum and valuation comfort.

The earnings upgrade cycle was high in India between 2021 and September 2024. The stage involved immense multiple growth, especially in the mid- and small-cap stocks, which put the valuation premium of India against other emerging markets at a near record.

The turning point was achieved as earnings reductions, particularly in consumer-based firms, fell to 20% or higher.

With multiples tightening while the momentum in earnings dissipated, global investors sought more attractive investments elsewhere, such as markets with great sectoral improvement, like memory chips in Korea and commodities in Brazil.

Are Domestic Flows Helping Or Delaying The Reset?

One of the distinctive aspects of such a cycle has been the consistent backing of the domestic institutional investors. Much of the foreign selling pressure has been taken up by the systematic investment plans (SIPs) and the mutual fund inflows.

Such persistent FII outflows would probably have generated a steeper market correction in past cycles. A more rapid price reset would have made valuations more convincing and might have brought back foreign capital earlier.

However, strong domestic buying has cushioned the downside. It has also assisted in the facilitation of more than $40 billion dollars of private equity exits without deep correction.

While this resilience reflects structural maturity in India’s capital markets, it may have delayed the valuation reset that typically precedes renewed foreign inflows.

When Could The Cycle Turn?

According to the recent quarterly reports, the rate at which earnings downgrades occur is declining, so it is possible that we have bottomed out. Nonetheless, a systemic upgrade cycle of earnings does not seem to be immediate.

A potential catalyst could emerge over the next three to six months as analysts begin shaping FY28 projections. Even modest upward revisions at that horizon could positively influence valuations and sentiment.

What Does This Mean For Investors?

The long-term growth story of India is intact. However, in the short term, markets will probably be dominated by the trends in earnings revision as opposed to macro headlines.

For investors, the key variable to monitor is a clear shift from earnings stabilisation to sustained upgrades.

Probably the real inflexion point will be reached when analysts start to reduce estimates but in fact increase them, especially in FY27 and FY28. Until then, returns may be stock-specific rather than index-driven.

Patience, earnings visibility, and focus on companies with resilient cash flows and improving revision trends could matter more than chasing short-term momentum.

Sources:

Economic Times
New Indian Express.