Indian Markets May Face Continued Pressure as FIIs Shift to China, More Selling Expected: Nomura

Japan-based brokerage firm Nomura Holdings has retained its structural overweight stance but acknowledges the risk of further multiple compression due to the positive sentiment surrounding China and various domestic challenges.

Nomura highlighted that its primary concern remains elevated valuations in the domestic market. Currently, the MSCI India Index trades at a price-to-earnings (PE) ratio of 21x, compared to historical averages of 19.6x (2015) and 21.5x (2022). However, the brokerage remarked that “valuations wouldn’t matter until they do”, implying that high valuations may not be a concern until market sentiment shifts.

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India vs. China: The Shifting Investment Landscape

A PE ratio of 21x could have been considered an attractive level for investors to rebuild positions, but growing optimism toward China—particularly after technological advancements such as DeepSeek, AI, robotics, and EVs—has provided an alternative investment destination. As a result, Nomura sees scope for further multiple compression in the near term as investors rebalance their portfolios.

The recent surge in Chinese equities indicates that they may no longer warrant a deep discount, as they once did. This has led to capital outflows from Indian equities, creating additional selling pressure. The India growth narrative is also facing tests from multiple headwinds, including:

• A slowing economy and weaker corporate earnings
• Downward revisions in earnings estimates
• Tight liquidity in the banking sector
• Potential US trade tariffs

A weakening and underperforming Indian rupee (INR)

Sustained and significant foreign investor outflows
These factors combined have intensified a vicious cycle of selling pressure, making Indian equities vulnerable to further corrections.

Foreign Investor Outflows and Market Implications

Nomura warns that foreign institutional investor (FII) selling could continue in the coming months. While foreign ownership in Indian stocks has fallen to a decade-low of ~16%, overseas investors still hold approximately $782 billion worth of Indian equities. This remains elevated compared to pre-pandemic levels, indicating that there is still room for further selling.

As long as China’s investment appeal remains strong, Indian equities may continue to face headwinds. The brokerage suggests that until market conditions stabilize or foreign investors see better entry points, capital outflows could persist.

Domestic Investor Sentiment and Market Outlook

So far, retail investors and domestic mutual funds have remained resilient, absorbing some of the selling pressure. However, Nomura cautions that investor confidence could weaken if domestic inflows slow down, potentially triggering a full market capitulation. This could ultimately create an attractive re-entry point for foreign investors.

From a long-term perspective, Nomura remains bullish on India’s structural growth story. The brokerage views the current slowdown as cyclical, rather than a structural multi-quarter downturn.

Technical Indicators and Market Trends

On the broader market front, the NSE 500 index appears technically oversold, with the percentage of stocks trading above their 200-day moving average (DMA) in both NSE 500 and Nifty 50 indices near record lows. Historically, such conditions have resulted in positive returns over 3-, 6-, and 12-month periods, with a high probability of success.

However, Nomura warns that today’s valuations remain significantly higher than those observed during previous market bottoms, which could impact the magnitude of any potential recovery.

As global investors continue to assess risk and opportunity across markets, India will likely remain an attractive long-term bet, but in the short term, volatility and foreign outflows could persist until sentiment shifts back in favor of Indian equities.