India's Market Lags Global Peers: Why FIIs Are Selling

Indian equity markets have started 2026 on a weak note, extending a prolonged phase of underperformance relative to global peers that began in 2025. Despite solid domestic economic fundamentals, a combination of factors including persistent foreign investor selling, elevated valuations, and a depreciating rupee has weighed on returns. This divergence has left many investors questioning whether this is a temporary correction or a more significant structural shift in market dynamics.

The Widening Performance Gap

The scale of India's underperformance is significant. Over the past 12 months, while the Nifty 50 index has delivered a respectable 13.8% return, it pales in comparison to other markets. The Korean benchmark, for instance, has surged by 146%, and Taiwanese shares have risen by 70%. This trend has continued across shorter time frames, with the MSCI India index posting flat-to-negative returns while other emerging markets like Brazil and Taiwan have recorded double-digit gains. In 2025, India recorded its weakest relative performance against Emerging Markets since 1994, a trend that has carried into the current year.

Foreign Investors Head for the Exits

A primary driver of this underperformance is the sustained outflow of capital from Foreign Portfolio Investors (FPIs). After pulling a record $19 billion from Indian equities in 2025, FPIs continued to be net sellers, withdrawing another $1.5 billion in the first two months of 2026. This exodus is driven by several concerns. Foreign investors are finding more attractive opportunities in other markets that offer stronger profit growth, better dividend yields, and more reasonable valuations.

The Valuation Hurdle

Despite the muted performance, Indian equities remain expensive compared to their global and emerging market counterparts. This valuation premium has made foreign investors unwilling to pay higher prices, especially when businesses in markets like Japan, Korea, and China offer more compelling growth prospects. Analysts suggest that unless valuations correct further or earnings growth accelerates significantly, attracting foreign capital will remain a challenge. The market's multiples have been held up, but a structural decline could be on the horizon.

Currency Drag Erodes Returns

The steady depreciation of the Indian rupee against the US dollar has further dampened sentiment among international investors. The rupee's slide to new lows, recently breaching the 90-per-dollar mark, directly erodes the returns for those investing with foreign currency. For a global investor, the rupee's weakness in 2025 nearly wiped out the Nifty 50's headline gains in dollar terms. This currency risk, fueled by concerns over external trade and high crude oil prices, remains a significant deterrent.

Missing the Global AI Rally

A key thematic driver for global markets has been the boom in Artificial Intelligence (AI). Markets in the US, Taiwan, and Korea have benefited immensely from investor enthusiasm for AI-related companies. India, however, lacks a significant number of large, listed companies that provide a direct play on the AI theme. Consequently, global capital seeking exposure to this high-growth sector has bypassed India, flowing instead into markets with established AI and semiconductor ecosystems.

JPMorgan's Cautious Outlook

According to JPMorgan, while the pace of earnings downgrades for Indian companies has slowed for FY26, the overall outlook remains measured. The firm projects that FY27 consensus growth estimates could be revised down from 16% to around 12-13%. Furthermore, when adjusted for currency weakness, the dollar-denominated earnings growth for Indian firms is expected to be in the mid-to-high single digits, which is less attractive compared to other regions.

The firm favors consumer discretionary stocks over capital expenditure-linked sectors, citing fiscal constraints that limit the government's capacity for fresh public spending.

Domestic Flows Provide a Cushion

The saving grace for the Indian market has been the consistent inflow from domestic investors, particularly through mutual funds. This steady stream of domestic capital has absorbed a significant portion of the foreign selling, preventing a more severe market decline. However, the momentum of these flows has shown signs of slowing in early 2026. The market's direction ahead will heavily depend on whether this domestic support can be sustained in the face of global headwinds and continued FPI caution.