India investment appeal dims as funds pivot to US in 2026

What changed for India-facing flows in early 2026

The quarter ended March 2026 was described in social and investor discussions as a tough period for foreign sentiment on India. India-focused offshore funds and ETFs saw net outflows of about USD 5 billion during the quarter. That was a sharper deterioration versus the USD 1.8 billion outflow recorded in the preceding quarter ended December 2025. The context repeatedly points to a mix of global headwinds and domestic market concerns arriving at the same time. Those headwinds included heightened geopolitical tensions in the Middle East, a resilient US dollar, elevated bond yields, and rising crude oil prices. On the domestic side, investors highlighted concerns around stretched valuations and the need for earnings to justify multiples. The result was a visible preference for safety, liquidity, and US assets over emerging market risk. Importantly, several posts framed this as a recalibration rather than an abandonment of India.

Offshore funds and ETFs: the numbers investors are quoting

A large part of the debate is anchored in a few widely circulated flow figures for India-focused offshore vehicles. Through the quarter ended March 2026, one India-focused offshore fund category recorded a net outflow of USD 3.46 billion. India-focused offshore ETFs also turned net sellers with outflows of USD 1.50 billion. This was a reversal from the prior quarter, when the same ETF segment saw net inflows of USD 552 million. On a cumulative one-year basis, the category has witnessed net outflows of USD 7.54 billion, reinforcing the idea of caution on India exposure within emerging market allocations. Social commentary often links these outflows to a global reduction in risk appetite rather than to a single India-specific trigger. Still, the repeated reference to valuations suggests price discipline has mattered in timing decisions. These data points are also being used by investors to argue that flows can move quickly when the global backdrop changes.

The global setup: geopolitics, yields, the dollar, and crude

The most consistent explanation in discussions is that emerging markets faced a broadly hostile environment. Heightened Middle East tensions involving the US, Israel, and Iran were cited as a factor that raised uncertainty. At the same time, the US dollar stayed strong and US bond yields remained elevated, pulling capital toward Treasuries and the dollar. Rising crude oil prices added another layer of pressure for import-sensitive economies. The narrative is that these conditions reduced global risk appetite and made safer assets relatively more attractive. Investors also flagged uncertainty around the timing of US Federal Reserve rate cuts. For India, these global factors interacted with domestic valuation concerns and currency sensitivity. Some participants also noted pressures from disruptions in fertiliser and energy supplies alongside higher crude prices. Taken together, the setup pushed portfolio decisions toward liquidity and perceived safety.

The US draw: AI-led growth and America-first positioning

A separate but connected theme is a global pivot toward the US, with AI-led growth acting as a magnet for capital. Posts summarised this as firms and funds tilting toward US opportunities, supported by policy signals described as America-first. This shift, as framed in the discussion, is dimming India’s standing as the fastest-growing economy in allocation debates, even if India’s growth story remains intact. Analysts quoted in the context also pointed to reduced allocations to markets perceived as lagging in the AI-driven investment cycle. That matters because global equity flows in 2025 and early 2026 have been influenced by where investors see the clearest AI-linked earnings visibility. In this framing, India is not necessarily being sold for weak fundamentals alone, but for opportunity cost versus AI-heavy regions and US-listed leaders. The macro trend is presented as important for investors and policymakers, but not yet an industry-shaking rupture. It is still enough to change marginal decisions on where incremental dollars go. The practical takeaway is that global themes can dominate country narratives for long stretches.

What foreign investors say they need: earnings proof and rupee stability

Emkay Global’s meetings with US long-only and hedge fund investors ahead of Union Budget 2026 captured a sceptical tone around earnings recovery. The messaging described clients as being in a “we will believe it when we see it” mode on earnings delivery. In that feedback, the rupee was described as an over-arching worry, with investors looking for clear signs of reversal before getting constructive. Emkay also said many investors viewed the completion of an India-US trade deal as a key catalyst for turning positive again. Importantly, the note suggested that rich valuation multiples alone were not seen as a binding concern, but valuations become harder to defend when earnings growth disappoints. It also highlighted worries about sluggish earnings growth with repeated estimate downgrades, India being left out of the AI theme, and high valuations constraining relative upside. Another specific datapoint discussed was rupee weakness of 7.5 percent against the dollar since US tariffs on April 4, even as the dollar index fell 6.5 percent in the same period. That combination amplified concerns that India-specific currency pressure, not just broad dollar strength, was influencing returns.

Policy and FDI climate: Surjit Bhalla’s criticism in focus

Surjit Bhalla, economist and author, was cited as calling the investment climate India’s biggest challenge, even beyond pressures from crude and supply disruptions. He argued that not only foreigners, even Indians were not investing in India, describing the investment environment as negative. Bhalla pointed to restrictive FDI policy since 2017 and linked a decline in FDI to the abolition or suspension process around Bilateral Investment Treaties (BITs) that began in 2017. He also said policy now is for FDI investment disputes to be settled in India rather than through a third party, and criticised the quality of the legal system. In his framing, estimates suggest about 30 percent of the decline in FDI could be attributed to the suspension of BITs. Social posts used these remarks to connect portfolio flows with longer-horizon capital decisions. While portfolio outflows can reverse quickly, this line of debate suggests longer-term investors also weigh dispute resolution and policy stability. The takeaway from the discussion is that regulatory confidence and legal certainty are part of the capital flow conversation.

What official and research commentary adds: FPI volatility and bond spreads

The Economic Survey 2025-26 highlighted heightened volatility in FPI trends during FY26, shaped by global financial conditions, currency moves, and relative performance. It noted that as of 13 January 2026, FPIs were net sellers of Indian equities with outflows of Rs 16,500 crore. The Survey also said that between April and December 2025, FPIs remained net sellers overall, citing underperformance versus major markets, trade and policy uncertainties, rupee depreciation, and a global risk-off backdrop amid elevated US bond yields. It added that these dynamics weighed particularly on export-oriented sectors such as IT and healthcare. On debt, the Survey pointed to how relative yield appeal can swing: in late May 2025, the spread between 10-year Indian and US government bond yields narrowed to 165 bps, reducing the relative attractiveness of Indian debt. By end-2025, it said the spread widened to 250 bps as Indian yields rose and the dollar weakened, improving the appeal of Indian bonds. It also flagged Sebi’s relaxation of FPI investment norms and ongoing India-US trade discussions as supportive for the debt inflow outlook. In the same breath, the Survey emphasised that DIIs, especially mutual funds and insurers, helped counterbalance foreign outflows and support markets.

State-owned investors, IPO pipeline, and what to watch next

Long-term pools also appeared to rotate away from India in 2025, based on Global SWF data cited in the discussion. Investments by state-owned investors in India fell to $1.7 billion in 2025 from $10.1 billion in 2024, a drop of more than 70 percent year-on-year. India’s share in their global investments shrunk to about 2 percent in 2025 from 9.5 percent in the previous year. Globally, state-owned investor deployments rose 32 percent in 2025 to $178 billion, with $132 billion, about half, going to the US. These figures reinforced the social narrative of developed-market preference when rates are high and geopolitics are tense, alongside a growing focus on digital infrastructure, data centres and AI. Against that backdrop, discussions also flagged elevated gross FDI repatriation and a strong IPO pipeline in 2026, with estimates suggesting IPO issuance could be US$10-25 billion in 2026, versus US$10 billion last year, and offer-for-sale activity remaining elevated. Separately, analysts in the context expect India’s current account deficit to widen to $17 billion in 2026, mainly driven by higher non-oil and non-gold imports as consumption improves. On the equity outlook, Goldman Sachs strategist Timothy Moe said India could stage a comeback in 2026 driven by earnings improvement rather than valuation expansion, with around 15% earnings growth expected for MSCI India in 2026 and growth still comfortably above 6%. The common thread across these points is that global capital is not permanently closed to India, but it is demanding clearer catalysts.