India risks foreign flows to EM peers as earnings differential narrows

After two consecutive quarters of selling, foreign institutional investors (FIIs) are set to close the three months ended June with inflows

As global funds are tiptoeing into Indian equities after a record selloff, a strong comeback might be thwarted as the earnings differential with its emerging market peers narrows.

 

In 2025, there is a risk of India losing its share of foreign institutional investor (FII) flows to emerging markets (EMs), Tata Asset Management Company said in a recent report. It added that FII's preference remains in the order of China, Europe, and then India.

 

This is due to India's earnings differential with emerging markets narrowing, the report said, adding that domestic stocks continue to trade at a premium compared to other Asian economies. "India’s outperformance versus its EM peers has reduced due to earnings downgrades in FY25 and China stimulus," the fund house managing assets worth ₹1.8 trillion said.

 

The report comes on the heels of India Inc. wrapping up its fourth-quarter earnings season, amid global uncertainties that have prompted a cautious outlook for the current financial year. While fourth-quarter earnings exceeded expectations, forward earnings revisions remain weak, the Tata AMC report noted.

 

About 72 per cent, or 36 out of 50 Nifty50 companies, saw a cut in their FY26 estimated earnings per share (EPS) in March 2025, as per JM Financial. In contrast, only eight companies, or 16 per cent of the Nifty50, saw an upgrade in FY26 EPS estimates. Subdued management commentary and macroeconomic uncertainties are likely factors behind the EPS cuts.

 

Earnings slowdown has hit EPS and valuations of benchmark equity indices, with index EPS up just 4.7 per cent year-on-year, the slowest pace since 2017, excluding the Covid period. 

Signs of recovery

After two consecutive quarters of selling, global funds are set to close the three months ended June with inflows. While the domestic equities saw outflows of ₹1 trillion and $1.16 trillion from the December 2024 quarter and March 2025 quarter, respectively.

 

For the month so far, FIIs have been net sellers to the tune of ₹2,126 crore, bringing their total net outflows to ₹94,617 crore, according to NSDL data.

 

Optimism grows following a significant de-escalation in trade tensions has resulted in FII inflows, the Tata AMC report said. “Amid India’s high valuations relative to its peers, FIIs' preference remains in the order of China, Europe, followed by India.”

 

Further, China's stimulus push and tariff threats under US President Donald Trump have also weighed on sentiment toward domestic equities.

 

Meanwhile, DIIs flows continue to remain strong with domestic institutions pumping in ₹3.29 trillion so far this year. 

Road ahead for markets

Benchmark indices have witnessed choppy trade over the past three weeks, with Thursday’s decline erasing gains accumulated over the previous three sessions.

 

Despite global uncertainties, foreign brokerages are cautiously optimistic on Indian equities. HSBC Research said that Asia and global emerging market (GEM) funds have started trimming their underweight positions in Indian equities, though global investors remain cautious.

 

The Nifty50 is projected to gain 9.8 per cent over the next 12 months, as per consensus estimates from analysts tracked by Bloomberg.

 

However, the Nifty50's projected return is the lowest among major Asian indices, with China’s CSI 300, Hong Kong’s Hang Seng, and Japan’s Nikkei expected to rise over 15 per cent.