Cheap Isn't Enough: Three Things FIIs Want Before They Buy India Again

Foreign institutional investors have offloaded Indian equities for 13 straight sessions, with the market rebound on Tuesday offering no blip in the selling streak. The FII exit came despite the market cheering government indicating that it is open to a rethink on long-term capital gains tax and securities transaction tax. 

The overseas investors who have pulled out in excess of Rs 3.1 lakh crore in calendar year 2026 so far, net-sold Rs 1,305.13-crore shares on Tuesday, even as the domestic institutional investors came to the rescue with a net-purchase of Rs 2,439.24 crore.

The net selling in October has crossed Rs 45,400 crore so far, per NSDL data, which is worse than the Rs 35,861 crore sell-off recorded in September.

Even as the DII buying remains strong, market analysts are firm that there is only a limit till where the domestic buyers would be able to absorb the FII exodus. For a sustained market recovery, the return of foreign investors remains essential.

So what would bring it back? WealthMills Securities' director of equity strategy, Kranthi Bathini, believes two factors are crucial for a turnaround. “They are relative valuation and growth visibility,” he said.

Valuation: Cheap, But compared With What

The Nifty trades at 19.1 times trailing earnings, against a median of 20.9 over its full history, 22.0 over five years and 23.3 over ten years, data as of Oct. 13 showed. Five years ago, the multiple was 27.5.

On its own history, India looks cheaper than it has in years. Bathini called the valuation attractive from a longer-term view. But the word he stressed was “relative”.

Global funds do not buy India in isolation. They choose between markets, Bathini explained, adding that money has been leaving emerging markets broadly, with emerging-market ETFs seeing outflows and the “hot money” that came into India now exiting. He pointed to the “Korea trade” as one reference point.

That trade is under strain. South Korea's Kospi closed 5.46% lower at 6,035.35 on Tuesday on worries over Chinese competition in memory chips. If funds rotate away from AI-heavy markets, India could be a potential beneficiary, but that requires a solid "growth visibility" on the earnings front, apart from relatively cheaper valuations, analysts say.

The second condition to draw back FIIs is tougher, as Indian markets trail in momentum-themed stocks, such as those pertaining to artificial intelligence and semiconductors. Bathini said global equity is chasing momentum, and what India lacks right now is the “wow factor” that attracts it.

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'Remove The Irritant'

Two market veterans say valuation and earnings are only part of it. On Tuesday, Finance Minister Nirmala Sitharaman said at the Bloomberg New Economy Forum in New Delhi that the government would hear views on long-term capital gains tax and securities transaction tax.

Ajay Bagga told NDTV Profit on Wednesday that India should benchmark its taxes against Hong Kong, Singapore and Dubai. “When your index has given 5% returns in 5 years, and the rupee has gone down sharply, and then you add STT and LTCG, they will wonder what the returns will be,” he said. “First remove this irritant. Then we can see what else we can do.”

India taxes long-term equity gains at 12.5% above Rs 1.25 lakh, and levies STT on both sides of delivery trades. Hong Kong and Singapore have no capital gains tax.

Gurmeet Chadha of Complete Circle Wealth Solutions told NDTV Profit that a Canadian pension fund head told him India is the only one of about 100 countries where the fund pays tax on its investments. “We can't fix wars, we can't fix globally rising yields. But we can fix the tax,” Chadha said.

In the age of AI, capital will chase momentum, and India must stay competitive and avoid high STT, Chadha said. He pointed to what he called a disconnect between markets and the real economy. GDP growth is strong, earnings are on track, and industrial output and bank credit data are healthy, yet FII outflows continue. “We have to acknowledge the issue, and I'm happy that it is being acknowledged,” he said. Synchronised efforts are needed to bring foreign investors back, he added.

The experts also raised a cloud over how long the inflows from retail investors would be able to sustain the pain caused by the exit of FIIs.  If markets don't show improvement in the next six months, systematic investment plans could start getting stopped and investors could move to other asset classes. “All the gains of the last 5-6 years can be undone,” Bagga warned.

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