Foreign investors have withdrawn nearly $40 billion from Indian stocks over the past two years, according to a Bernstein report. The analysis highlights that concerns over stagnant large-cap companies and structural limitations in the mid-cap space are delaying a return of capital, despite India’s long-term potential.
Foreign institutional investors (FIIs) have pulled approximately $40 billion out of the Indian equity market over the last two years. This shift in sentiment reflects a broader hesitation among global funds to commit long-term capital to the region. According to a recent analysis by brokerage firm Bernstein, this trend is unlikely to reverse quickly without fundamental changes within the Indian corporate sector.
Large-Cap Stagnation Concerns
The report highlights a growing gap between market expectations and the actual performance of India’s largest companies. Bernstein suggests that many established large-cap firms remain focused on protecting legacy business models rather than aggressively investing in innovation or new technologies. This lack of modernization has raised concerns about these companies' ability to compete in global sectors like advanced energy, semiconductors, and battery storage. Investors appear to be questioning whether these firms can maintain growth without adapting to the changing global landscape.
Hurdles in the Mid-Cap and Small-Cap Segment
While some investors have looked toward small- and mid-cap (SMID) companies for growth opportunities, this segment also presents significant challenges for global funds. The report points out that many firms in this space suffer from low liquidity, meaning shares are not easily bought or sold in large quantities without impacting the price. Additionally, there is a lack of deep, institutional-grade analyst coverage, making it difficult for large global funds to conduct the necessary research to commit capital safely. For these funds, the effort required to separate high-growth businesses from market noise is often seen as a hurdle that outweighs potential gains.
The Performance Gap
Underwhelming historical returns have also played a significant role in recent sentiment. The Nifty index has delivered roughly 6% annualized returns in US dollar terms over the last decade, a figure that some global managers find insufficient given the risks and higher valuations associated with emerging markets. When combined with execution uncertainty and a reliance on consumption-led growth rather than manufacturing innovation, the Indian market has become a more difficult sell for institutional managers seeking stable returns.
Investors may track whether Indian companies can pivot toward more globally competitive industries to attract a fresh wave of foreign capital. The key for a potential turnaround will likely depend on whether corporations can demonstrate consistent growth through innovation rather than relying on existing market positions. Until there is clear evidence of this shift, global funds may continue to prioritize risk-reward ratios in other markets, keeping pressure on potential inflows into Indian equities.