FII Outflows in India Prompt Reassessment of Valuations and Liquidity by Global Funds

Foreign investors have reduced exposure to Indian equities despite steady economic growth. Around $40 billion has exited Indian stocks in the last two years. Bernstein linked the trend to several connected issues, not one risk factor. For Dalal Street, the shift matters because overseas flows often influence liquidity and market pricing.

Bernstein estimated combined FII outflows of $56.3 billion over the past 24 months. That contrasted with $38.6 billion of inflows in the prior 24-month period. The selling stood out as India expanded strongly. Government data showed 7.8% growth in the April-June quarter of FY2026-27.

The same quarter showed higher output in rupee terms. Real GDP was Rs 81.36 lakh crore. It rose from Rs 75.46 lakh crore a year earlier. Yet equity positioning by many global funds stayed cautious. Bernstein framed this as a valuation, returns, and market-structure story.

Metric	Figure
FII flows, last 24 months	-$56.3 billion
FII flows, previous 24 months	+$38.6 billion
Equity selling mentioned over two years	~$40 billion
GDP growth (Apr-Jun, FY2026-27)	7.8%
Real GDP (Apr-Jun quarter)	Rs 81.36 lakh crore
Real GDP (year-ago quarter)	Rs 75.46 lakh crore
Nifty dollar return, past decade (annualised)	~6%
Nifty dollar return, last two years (annualised)	~-11%
Flow-rupee correlation in recent years	>70%
Rupee level noted	Below Rs 96 per US dollar (September 29)
September withdrawals at that point	~$3.7 billion (equities and bonds)

Bernstein pointed to valuations as a central concern. Indian equities stayed pricier than several emerging market peers. Global funds may accept a premium with durable earnings growth. Bernstein suggested that trade-off now looked harder. As a result, high prices alone became a hurdle for fresh allocation decisions.

FII outflows and dollar returns: Nifty and Sensex pressure

Dollar-based performance also shaped the decision. Bernstein said the Nifty delivered about 6% annualised returns in US dollar terms over a decade. Over the last two years, the annualised move was close to an 11% decline. That mix reduced the appeal of India within global equity models.

FII outflows and large-cap stocks: growth versus liquidity

Bernstein also questioned how India’s large-cap companies adjusted to fast technology change. Some older business models faced pressure from artificial intelligence, automation, and shifting consumer behaviour. Smaller firms could show stronger growth, yet scale remained a constraint. Large institutions needed liquidity, which smaller stocks often could not provide.

FII outflows and AI investment: where global capital is moving

Another driver was the global AI investment cycle. Taiwan and South Korea gained from semiconductors, AI hardware, and related supply chains. China also offered opportunities at comparatively different valuations. India had not produced a major listed AI champion at the scale global investors sought.

FII outflows and the rupee: currency adds risk for overseas funds

Currency moves could dilute equity gains for dollar investors. Bernstein said the link between FII flows and the rupee strengthened. The correlation rose above 70% in recent years. Pressure showed in September as the rupee slipped below Rs 96 per dollar on September 29.

Rising crude prices added another layer of concern for India as a major oil importer. Bernstein noted that foreign investors had withdrawn about $3.7 billion from Indian equities and bonds in September at that point. The same period highlighted how FX and macro costs could shape near-term flows.

FII outflows and outlook: what could bring foreign investors back

Bernstein expected FII flows over the next 12 months to be flat to modestly positive. A steadier return, Bernstein argued, depended on building new globally competitive industries. Semiconductors, energy storage, and advanced manufacturing were cited as potential magnets. For now, foreign investors looked more selective than absent.