FII Outflows in Indian Equities Persist, Bernstein Warns on Valuation and Currency Risks

Foreign investors have taken about $40 billion out of Indian equities in two years. That retreat has stood out on Dalal Street during steady economic expansion. A Bernstein analysis said the reasons go beyond weak global mood or short-term swings. The report pointed to valuation, returns, sector mix, and currency moves.

Bernstein’s data showed sustained selling by foreign institutional investors, or FIIs. Combined FII outflows totalled $56.3 billion in the last 24 months. That compared with $38.6 billion of inflows in the prior 24 months. The shift has mattered because foreign money often supports market liquidity and pricing.

Government data showed India’s economy grew 7.8% in the April-June quarter of FY2026-27. Real GDP was Rs 81.36 lakh crore during the quarter. That was up from Rs 75.46 lakh crore a year earlier. The strength in activity made continued FII selling look more unusual to many investors.

Bernstein flagged valuations as a central hurdle for Indian equities. Indian stocks have stayed relatively costly against several emerging market peers. Paying a premium can work when earnings growth stays strong for years. Bernstein suggested that trade-off has become harder for global funds to defend at current levels.

Dollar-based performance has 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 index had an annualised decline near 11% in dollar terms. Those figures can weaken India’s case in global asset allocation.

FII flows and AI: global sector shifts and India’s gaps

The report linked some outflows to the global AI investment cycle. Taiwan and South Korea have gained from semiconductors and AI hardware supply chains. China has also offered opportunities at comparatively different valuations. India has not produced a large listed AI leader at the scale many global investors seek.

Bernstein also discussed pressure on large-cap Indian companies. Traditional businesses have faced disruption from AI, automation, and changing consumer choices. Smaller firms may offer higher growth, yet they can be hard to buy in size. Large funds then face a trade-off between growth prospects and usable liquidity.

FII flows and the rupee: currency impact on foreign returns

Currency moves have added another constraint for dollar investors. A weaker rupee can reduce equity gains after conversion. Bernstein said the correlation between FII flows and the rupee rose above 70% in recent years. The rupee fell below Rs 96 per dollar on September 29, amid higher crude prices.

By that point in September, foreign investors had withdrawn about $3.7 billion from equities and bonds. Bernstein expected FII flows over the next 12 months to be flat to modestly positive. The report said a stronger return may depend on new competitive industries, including semiconductors and energy storage.

For now, Bernstein’s reading suggested FIIs were becoming more selective rather than exiting India fully. India remains a large and expanding economy, yet growth alone may not be enough. Global investors have also weighed earnings delivery, valuation comfort, rupee stability, and companies positioned for newer technology cycles.

Indicator	Figure	Period / Detail
FII equity flows	-$56.3 billion	Combined outflows, last 24 months
FII equity flows	+$38.6 billion	Combined inflows, previous 24 months
GDP growth	7.8%	April-June quarter, FY2026-27
Real GDP	Rs 81.36 lakh crore	April-June quarter, FY2026-27
Real GDP	Rs 75.46 lakh crore	Year-ago quarter comparison
Nifty returns (USD)	~6% annualised	Past decade
Nifty returns (USD)	~-11% annualised	Last two years
Rupee level	Below Rs 96 per dollar	September 29
Foreign withdrawals	~$3.7 billion	Equities and bonds, September to that point