Domestic Buyers Counter Foreign Sell-off

Despite weakening foreign investor sentiment, Indian equity markets showed resilience on Friday, April 10, 2026. The Sensex and Nifty50 both gained ground, showing the power of domestic buying amidst large outflows from foreign portfolio investors (FPIs). This shows a contrast between global worries and India's own market forces.

Several factors are driving this shift away from India, according to Nithin Kamath, co-founder of Zerodha. India is seen as vulnerable to geopolitical risks, especially oil price shocks due to its heavy reliance on imports. High market valuations and a perceived lack of AI-driven investment themes are also pushing capital towards markets like Japan, Taiwan, South Korea, and Europe. A weaker rupee has also discouraged foreign investment. These issues have led to significant foreign institutional investor (FII) outflows totaling ₹1.62 lakh crore since recent conflicts began, and ₹2.1 lakh crore year-to-date in 2026. Despite this, on Friday, April 10, the Sensex rose 0.87% to 77,294.95, and the Nifty50 gained 1.01% to 24,015.55. Broader indices, including the Nifty MidCap and SmallCap, also climbed. This happened as foreign investors sold equities, with about $4.9 billion leaving in April alone. The market's strength was primarily driven by substantial inflows from Domestic Institutional Investors (DIIs), who provided a key buffer against foreign selling.

Global Investors Seek Other Markets Amid Tax and AI Concerns

Foreign investors are looking for markets they view as less risky or offering better value. Taiwan and South Korea are benefiting from their AI supply chain strength, an area where India is perceived to be behind, despite high domestic AI use and investment potential. India's tax system also makes it less competitive. Higher taxes on long-term and short-term capital gains, plus increased Securities Transaction Tax (STT), deter investors compared to global rivals. Specifically, the hike in long-term capital gains (LTCG) tax on equities to 12.5% and the end of indexation benefits in the 2024 Union Budget have notably reduced after-tax returns for foreign investors, especially those who cannot claim double taxation relief. Markets like Singapore and the UAE, which have no capital gains tax, offer a stark contrast. In US dollar terms, foreign investors have seen flat returns from Indian equities since September 2021. March 2026 saw an unprecedented ₹1.2 lakh crore in monthly outflows. While some analysts, like Morgan Stanley, predict significant Sensex gains by end-2026, suggesting a turning point and good valuations, others, like Nomura, have downgraded India due to high energy prices.

Persistent Risks Cloud India's Economic Outlook

However, significant risks remain for the Indian market. India's heavy reliance on oil imports (around 88%) makes it highly susceptible to geopolitical instability in the Middle East. Brent crude prices around $96.50 per barrel reflect this geopolitical risk. Higher oil prices threaten India's current account deficit, inflation, and rupee, potentially forcing difficult policy decisions from the Reserve Bank of India. The World Bank and RBI have warned that sustained high oil prices could slow GDP growth and increase inflation, showing the fragility of India's economic stability. India's tax structure, though targeted for reform, currently deters investors compared to Asian peers like Taiwan and South Korea. Furthermore, continued domestic inflows rely on economic strength and investor confidence, which could falter amid prolonged global uncertainty or renewed geopolitical tensions. The absence of strong domestic AI investment themes, a key growth driver elsewhere, is also a concern for foreign capital.

Attracting Foreign Capital Requires Policy Tweaks

To attract foreign investors back, India needs to address structural issues deterring capital. Nithin Kamath suggested that simplifying the capital gains tax rules and STT could quickly boost India's appeal. Analysts at Morgan Stanley and Goldman Sachs are optimistic about India's long-term prospects, citing earnings growth and reforms. However, these positive forecasts depend on a stable geopolitical climate and easing energy prices. Sustaining market gains will likely rely on continued domestic demand and institutional support, alongside policy changes to boost foreign investor confidence and lower costs.