Foreign Investors Unlikely to Return to India Soon; China Seen as a Stronger Option: Analysts

The past five months have been particularly challenging for investors in the Indian stock market. A prolonged phase of time-wise correction, which began in October 2024, has led to a significant decline in benchmark indices. The NSE Nifty and BSE Sensex have dropped by 13% and 12.5%, respectively, from their peak levels.

The downturn has been even steeper in the broader markets, with the Nifty MidCap index losing 18% and the Nifty SmallCap index plummeting by 20%.

According to analysts, a major factor behind this correction is the substantial withdrawal by foreign investors, who have been offloading Indian equities. Since October 2024, foreign institutional investors (FIIs) have divested Indian stocks worth ₹1,56,258 crore. In 2025 alone, they have offloaded equities amounting to ₹99,299 crore.

Interestingly, the timing of FIIs' exit from Indian markets coincided with China's government introducing a series of stimulus measures aimed at reviving its sluggish economic growth.

Shift in Global Investment Trends

A report by Motilal Oswal Financial Services indicates that the MSCI India index was on an upward trajectory from January to September 2024. During this period, it briefly outperformed the MSCI China index (June–September 2024). However, since then, the MSCI China index has surged past its Indian counterpart.

"China's stock valuations remain highly attractive in the short to medium term," noted Kranthi Bathini, Director of Equity Strategy at WealthMills Securities. He pointed out that the Shanghai Shenzhen CSI 300 index is currently trading at 16 times earnings, compared to its 5-year and 10-year averages of 15.3x and 15.2x, respectively. This has drawn the attention of hedge funds and high-risk investors. In contrast, India's Nifty index trades at 21.4 times earnings, which is above its 10-year and 5-year historical averages of 22.8x and 23.9x, respectively.

Meanwhile, both MSCI India and MSCI China indices have underperformed major global indices (including those of the UK, France, Japan, and South Korea) in 2025 so far, declining by 2% in US dollar terms.

Foreign Outflows Impact Emerging Markets

Data from Kotak Securities highlights that foreign portfolio investment (FPI) flows have been negative for most key emerging markets, except Thailand, in February. Outflows were recorded in India ($2,189 million), Brazil ($21 million), Indonesia ($381 million), Malaysia ($59 million), the Philippines ($5 million), South Korea ($276 million), Taiwan ($1,114 million), and Vietnam ($235 million). However, Thailand bucked the trend with an inflow of $17 million.

Analysts attribute this trend to the strengthening US dollar, driven by protectionist policies under President Donald Trump.

Outlook for Indian Markets

Going forward, analysts suggest that Indian investors should remain patient as foreign capital is likely to favor China in the short to medium term.

"The primary reason for persistent FII selling has been India's high market valuations. December quarter (Q3FY25) earnings indicate just 7% growth for Indian companies, which doesn't justify such elevated valuations. Additionally, the strengthening US dollar has worsened the situation," explained V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

However, over the long term, analysts anticipate a return of foreign investments to India, supported by strong economic fundamentals.

"India's macroeconomic indicators remain solid, and both growth and corporate earnings are poised for recovery. Furthermore, rising inflation in the US, fueled by Trump's tariffs, may prompt the Federal Reserve to adopt a more hawkish stance. This could weaken US markets and the dollar, thereby encouraging foreign capital inflows into India over time," Vijayakumar added.

Trump's Reciprocal Tariff Policy

President Trump has introduced a new policy implementing reciprocal tariffs on trade partners, aiming to match tariffs imposed by other countries.

According to Gaurang Shah, Head Investment Strategist at Geojit Financial Services, this move could impact foreign investment flows into Asia's largest economies.

However, Bathini remains optimistic that both the US and China, given their deep trade interdependence, may negotiate an amicable resolution before the tariffs take full effect.

For India, which Trump has previously criticized for having the highest tariffs among Asian nations, clarity on trade policies will be crucial in determining FII sentiment. Shah believes that foreign investors will adopt a cautious approach until there is more certainty regarding India-US trade relations.