Foreign portfolio investors (FPIs) have pulled out an estimated $65 billion from Indian equities since the market peaked in 2024, taking foreign ownership to a 15-year low. This has happened even as India’s economy continues to grow strongly and corporate earnings recover.
The disconnect has raised questions about what is driving foreign investors away. Are elevated crude oil prices and the threat of artificial intelligence (AI) to India’s services industry serious enough to undermine the country’s economic prospects? Or are investors becoming too pessimistic about an economy whose growth fundamentals remain strong?
At the Rising Bharat Summit, Ridham Desai, MD of Morgan Stanley India, and Prashant Jain, Founder and CIO of 3P Investment Managers, discussed these concerns and the outlook for Indian equities. Both argued that India’s economic resilience was stronger than the market narrative suggested, although they acknowledged that some risks would take time to play out.
Why high crude oil prices may be less damaging to India
India’s dependence on imported crude oil has traditionally made it vulnerable to price shocks. But Desai argued that the economy’s ability to absorb higher oil prices has improved considerably over the past 15–20 years.
He compared the situation with 2008, when crude oil prices reached $140 a barrel. At the time, India’s annualised July oil import bill would have amounted to 13% of gross domestic product (GDP), according to his calculations. At an oil price of $120 and current import levels, the bill would account for less than 4% of GDP.
The growth in services exports has provided an additional buffer on the current account, reducing the strain from higher oil imports. Desai believes foreign investors continue to assess India’s oil vulnerability using assumptions from an earlier period, overlooking these changes.
Jain broadly agreed, pointing to the combination of FPI outflows, foreign direct investment (FDI) repatriation, elevated oil prices and higher gold imports in recent years. Despite these pressures on the balance of payments, India had managed the situation reasonably well, he said.
That does not mean oil prices no longer matter. Jain cautioned that crude at $120–140 a barrel for an extended period would create additional economic stress. His argument was that India could manage the pressure, not that it would be unaffected.
Can AI disrupt India’s services economy?
The threat from AI is more complicated because it concerns not just current economic performance but also the future of an industry that has helped India build a strong position in global services.
Desai noted that India’s share of global GDP is about 4%, while its share of manufactured goods trade is around 1.8–1.9%. Its share of global services, excluding tourism, is close to 8%, according to him. A sustained disruption to services could therefore have implications beyond the IT industry.
The emergence of AI models capable of coding has intensified concerns about traditional IT services companies. Desai acknowledged that the industry had anticipated the challenge, but said it was too early to conclude that AI would weaken India’s services exports overall.
He also identified the expansion of global capability centres (GCCs) as a source of pressure on IT services firms. Companies can now establish centres with teams of just 400–500 people, making it easier to bring work in-house rather than outsource it to service providers.
Yet Desai said the export data did not suggest a broader disruption so far. He cited year-to-date services export growth of 15%, excluding September because the final figure was not available when he spoke.
“The jury is out,” Desai said when asked whether India would lose out as AI transforms the industry. He believes India will be able to manage the transition, but acknowledged that the outcome remains uncertain.
The employment figures also put the potential disruption into perspective. Desai estimated that India’s IT industry employed 4.1 million people, compared with 80 million in the formal sector. GCCs employed around 2 million, he said, adding that average salaries at these centres were three to five times those in IT services.
A shift in employment from IT services firms to GCCs could therefore change where jobs and income are generated without necessarily weakening the broader economy. However, the transition could still cause significant pain for affected workers and communities, as Jain acknowledged.
The distinction is between the future of traditional IT services firms and the resilience of India’s wider services economy. The former faces uncertainty, but both Jain and Desai argued that the available evidence did not yet establish that AI would materially undermine the latter.
Why weak stock-market returns do not necessarily signal weaker economic fundamentals
The concerns over oil and AI have coincided with two years of weak market performance. Jain argued that investors should assess the outlook for equities over a longer period rather than extrapolate from recent returns.
He said that, over the past 25 years, Indian markets had performed well in the three years following periods in which they fell by more than 15% over two years. With valuations now more reasonable, economic growth strong and macroeconomic fundamentals stable, he expects Indian equities to deliver low- to mid-double-digit returns over the next three years.
Jain also challenged the argument that the supply of new shares was holding back the market. He estimated that close to $100 billion had been raised over two years through new fund offers, initial public offerings, qualified institutional placements, offers for sale and block trades.
He said capital raising tended to increase when foreign investors were buying and ease when they were selling. This had helped the market absorb substantial FPI outflows alongside new issuance without a more severe decline.
However, Jain’s central argument was that the volume of shares being sold or issued was not the main determinant of longer-term returns. Valuations at the time of investment and subsequent earnings growth mattered more.
Desai agreed that short-term demand and supply could distract investors from these underlying drivers. Equity markets, he argued, do not deliver returns in a straight line; periods of little movement can be followed by sharp gains.
He also questioned whether the end of the global AI investment boom would necessarily bring foreign investors back to India. South Korea, which Desai described as the biggest country-level beneficiary of the recent AI capital expenditure boom, had seen its chip companies’ earnings rise sharply even as its stock market fell 35% from its peak and foreign investors sold $150 billion of equities that year.
The example challenged the assumption that a change in the global AI trade would automatically redirect foreign money towards Indian equities. The outlook for India, Desai suggested, would also depend on its own earnings and valuations.
Why India still needs foreign capital
Weak FPI flows and the country’s need for foreign capital are related, but they are not the same issue. Portfolio flows influence the stock market, while foreign investment also helps finance India’s wider economic expansion.
Desai said India’s domestic savings rate was around 28–30%, below its investment rate of 31.5%. Households save about 20% of their annual income, while the corporate sector saves around 7–8%, according to his estimates. The gap between savings and investment means India needs foreign capital to fund the difference.
Desai sees FDI as particularly valuable because it provides longer-term capital, creates jobs and transfers technology. It is also less likely than portfolio investment to leave in response to short-term market volatility or an increase in oil prices.
He put FDI at about $100 billion, or roughly 2–2.5% of GDP, and argued that the figure should rise to 5% of GDP. A substantial increase would reduce the importance of fluctuations in FPI flows, although it would not eliminate India’s need for foreign savings.
For Desai, the priority is to maintain a high investment rate because investment is directly linked to economic growth. India needs to grow quickly enough to improve living standards and lift more people out of poverty, and domestic savings alone are not sufficient to finance that ambition.
The distinction is central to understanding the current market debate. Weak foreign portfolio flows do not, by themselves, demonstrate that India’s economic foundations are deteriorating. But attracting long-term foreign capital remains essential to financing the investment needed to sustain growth.