Vikas Khemani of Carnelian Capital suggests foreign investors aren't abandoning India due to negativity but are strategically rebalancing emerging market portfolios. He notes that increased allocations to AI-driven markets like Taiwan and Korea led to reduced Indian equity exposure, not a loss of faith in India's growth. Khemani believes outflows have ebbed and anticipates a return of foreign capital as global liquidity improves and US interest rates fall.
Foreign Selling a Portfolio Shift, Not Negative Stance
Vikas Khemani, founder of Carnelian Capital, asserts that the significant selling of Indian equities by foreign institutional investors (FIIs) over the past two years is not indicative of a negative outlook on India's growth story. Instead, he argues, it reflects a strategic reallocation within emerging market portfolios.
"People think that foreigners are selling India because they're negative on India. I think it's a misunderstood concept," Khemani stated in an exclusive interview. He explained that India has historically been part of a broader emerging market basket for many global investors. During periods of aggressive interest rate hikes by the US Federal Reserve, capital typically flows out of emerging markets. However, India initially bucked this trend in the post-COVID era due to exceptional investor optimism.
India's Overweight Position and AI Trade Rotation
By 2023, India had become a significantly overweight position in many emerging market portfolios, with some investors allocating as much as 25-30 percent. Khemani likens this situation to a portfolio manager rotating between sectors. As the artificial intelligence-driven technology trade gained momentum in markets like Taiwan and Korea, investors reduced their overweight positions in India to increase exposure elsewhere. This shift, Khemani contends, was more about capitalizing on new opportunities rather than a fundamental rejection of India.
He also highlighted that large sovereign wealth funds and long-term investors, such as Norges, GIC, and Temasek, continue to maintain record high exposure to India, suggesting a constructive long-term view from dedicated allocators.
Outflows Stabilizing, Positive Flows Expected
Khemani believes the portfolio adjustment phase is largely complete, and the outflow has "ebbed." He indicated that incremental sell flows have turned slightly positive, suggesting a stabilization in foreign investment. The direction of US interest rates remains a key trigger for future capital flows into emerging markets, including India.
The Convergence of Domestic and Foreign Flows
A significant point Khemani raises is the potential market impact when both domestic institutional investors (DIIs) and FIIs are actively buying. While DIIs and retail investors have provided consistent support through SIPs and mutual fund inflows during periods of foreign selling, a concurrent return of foreign capital could create a powerful upward dynamic. He questions, "What will happen when domestic flows are positive and foreign flows are positive?"
India's Evolution into a Standalone Asset Class
Looking ahead, Khemani anticipates India will eventually evolve from being a component of emerging market allocations to becoming a standalone asset class. Drawing parallels with Japan's economic boom, he believes India's sustained growth, corporate profitability, and strong returns on capital will make it increasingly difficult for global investors to ignore. He noted that India's dollar-denominated returns over the past 25 years have been among the best globally, second only to the US, reinforcing his conviction in its long-term investment appeal despite short-term fluctuations.