Foreign Investor Interest in India 'Died Out,' Warns Nithin Kamath

Foreign Investor Appetite for India Cools Sharply

Nithin Kamath, the founder and CEO of Zerodha, has sounded a note of caution regarding foreign investor sentiment towards India, stating that interest has "pretty much died out." In a series of public comments, the head of India's largest stock brokerage pointed to a combination of geopolitical risks, steep valuations, and domestic policy hurdles that are prompting global investors to reconsider their allocations to the Indian market.

According to Kamath, feedback from industry participants suggests a significant shift in perception. Foreign investors are increasingly viewing India as geopolitically exposed, particularly to potential oil price shocks. This, coupled with a perceived lack of compelling investment opportunities in the artificial intelligence (AI) sector, has dampened the country's appeal compared to other global markets.

Valuations and Policy Act as Deterrents

A primary concern for overseas investors is the high valuation of Indian equities. After a strong run, many investors who were sitting on substantial gains have decided to take profits. Kamath noted that this capital is not just sitting on the sidelines but is being actively reallocated to markets like Japan, Taiwan, South Korea, and parts of Europe, which are currently seen as offering more attractive relative valuations and growth prospects.

Adding to the valuation concerns are policy-related issues. Kamath specifically highlighted India's capital gains tax framework as a significant pain point. The structure for Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG), along with a recent increase in the Securities Transaction Tax (STT), has made the Indian market less competitive. This sentiment is shared by other market experts who have criticized the move in the 2024 Union Budget to increase the LTCG tax on equities from 10% to 12.5%, warning it could deter foreign capital.

The Data Reflects a Worrying Trend

The concerns raised by Kamath are mirrored in the recent market data, which shows a sustained outflow of foreign capital. Foreign Institutional Investors (FIIs) have been significant net sellers, impacting market performance. The benchmark Nifty 50 index has declined by approximately 9% this year, a move largely attributed to persistent selling pressure from foreign funds.

This trend of outflows is not new but has accelerated. While FPIs invested ₹1.71 lakh crore in 2023, they withdrew a record ₹1.66 lakh crore in 2025. The current year has continued this negative trajectory, with significant withdrawals impacting market stability.

A Call for Domestic Strength and Policy Fixes

While highlighting the challenges in attracting foreign capital, Kamath also emphasized the need for India to build its own strategic capabilities. He warned that an over-reliance on IT service exports is no longer a sustainable strategy in a world where technology is becoming increasingly "nationalized." He urged for a greater focus on building a domestic deep-tech ecosystem, covering areas like semiconductors, batteries, and defense systems, to ensure self-sufficiency and reduce dependency on volatile global supply chains.

Kamath believes that India possesses the talent to build these capabilities but needs a more supportive ecosystem, including R&D tax credits, subsidies, and streamlined approvals. He pointed to the success of industrial clusters in China and urged Indian states to compete in creating similar high-density hubs for deep-tech innovation.

The Path Forward

To address the immediate issue of waning FPI interest, Kamath suggested that policy adjustments are crucial. He described fixing the tax structure related to capital gains and STT as a "low-hanging fruit" that could quickly improve India's attractiveness. Attracting foreign capital remains important for market depth and stability, and such reforms could send a positive signal to the global investment community.

In conclusion, the commentary from one of India's leading market figures serves as a timely reminder of the challenges facing the Indian equity market. While domestic investors have provided a cushion, the sustained exit of foreign capital highlights the need for a re-evaluation of both market valuations and policy frameworks to ensure India remains a compelling destination for global investors.