Foreign institutional investors (FIIs) have significantly reduced their exposure to Indian equities, withdrawing approximately $40 billion over the past two years. This substantial outflow comes despite India's consistent economic growth, prompting questions about the changing dynamics of global investment in the country.
A recent report by Bernstein, titled “India Strategy: When will FIIs return?” and dated September 21, 2026, highlights that the traditional factors driving foreign capital into India have undergone a major transformation. The analysis indicates a combined FII outflow of $56.3 billion in the latest 24-month period, a stark contrast to the $38.6 billion in inflows seen in the preceding two years.
Shifting Investment Paradigms
Bernstein's research points out that the historical link between India's robust economic growth and foreign investment has significantly weakened. Prior to 2007, FIIs closely tracked India's macroeconomic strength, with GDP growth and foreign flows showing a strong correlation. However, this relationship has eroded over time, and in recent periods, the correlation has even turned negative.
Similarly, the influence of interest-rate differentials between India and the US on FII flows, which was notable from 2012 to 2018, has also faded in the last four to five years, according to the report.
Rupee Performance and Valuations Gain Importance
The report identifies the Indian rupee's performance against the US dollar as an increasingly critical factor for foreign investors. Bernstein's findings indicate a strong correlation of 72.9% between FII flows and rupee movement in the most recent analysis period. For dollar-based investors, a weakening rupee can diminish returns even if Indian stocks perform well in local currency terms.
Valuations also pose a significant concern. Bernstein observes that higher Indian market valuations relative to other emerging markets have increasingly coincided with weaker FII flows since 2020. The analysis shows average relative valuations rising to 162% in the latest period, alongside a net FII outflow of $44 billion.
Path to Attracting Sustained Foreign Capital
While temporary improvements in global oil prices, corporate earnings growth, or broader macroeconomic conditions might trigger cyclical foreign inflows, Bernstein argues that sustained investment requires more profound structural changes. The report suggests India needs to develop globally competitive businesses in advanced sectors such as semiconductors, batteries and energy storage, space technology, defense, and deep-tech innovations.
For the next 12 months, Bernstein projects FII flows to be flat to modestly positive. However, this outlook is primarily based on an anticipated easing of near-term headwinds rather than a fundamental structural improvement in investment attractiveness.