Foreign outflows meaningful, but not overwhelming: Citi's Kaustubh Kulkarni

Investors remain interested in India, but the AI theme is dominating global conversations, says Kulkarni

India’s investment narrative is being overshadowed by the artificial intelligence (AI) theme dominating global markets, says Kaustubh Kulkarni, head of investment banking, Asia-Pacific, at Citi. In an interview with Samie Modak and Manojit Saha in Mumbai, Kulkarni argues that investor focus will eventually shift back to fundamentals, with Indian firms capable of consistently compounding earnings at 15-20 per cent, continuing to attract capital. Edited excerpts:

 

What explains the recent pressure on the rupee and foreign investment outflows? 

The sharp rise in US interest rates during 2024 and 2025 widened interest-rate differentials and attracted capital back to the United States. At the same time, India experienced softer foreign direct investments (FDI) inflows while facing higher import bills, particularly for oil and gold. Exports were not growing at the same pace. When a country’s external account faces such pressure, the currency becomes one of the primary shock absorbers. The rupee’s depreciation reflects these dynamics and was accelerated by recent geopolitical developments.

 

Are foreign portfolio outflows solely a function of higher US rates? 

No. Rates are important, but earnings-growth expectations also matter. The global environment has changed significantly, and investors are assessing growth opportunities across markets. India has seen FPI selling, but it is important to keep the scale in perspective. Foreign investors own roughly $800-850 billion of Indian equities. Annual outflows of around $25 billion are meaningful, but not overwhelming. Similar or even larger outflows have occurred in markets such as South Korea without significantly disrupting them because domestic liquidity has remained strong.

 

What are foreign investors telling you about India? 

Investors remain interested in India, but the AI theme is dominating global conversations. Investors are generating significant returns from AI-related opportunities in the US, Korea, Japan and China. 

Naturally, they ask how they can participate in that theme through India. At some point, however, India’s investment case will return to fundamentals. Companies that can consistently compound earnings at 15-20 per cent will continue to attract capital.

 

How do you see earnings growth evolving? 

It may take some time for growth to re-accelerate. Companies are facing pressure from rising costs, inflation and energy prices. Global supply-chain shifts are also happening rapidly, and the ability to capture those opportunities depends on how efficiently the broader ecosystem responds. The key question is whether India can continue delivering 15 per cent earnings growth over the medium term. If the answer is yes, markets will ultimately reflect that. If growth settles at a lower rate, valuation adjustments may take longer.

 

India has had two strong IPO years. How do you view the current market? 

The IPO pipeline remains healthy. The main issue is valuation alignment between issuers and investors. Many companies do not face immediate pressure to raise capital or monetise holdings. Existing shareholders are sitting on significant gains, which means they can afford to wait for the right market conditions. At the same time, domestic mutual funds continue to receive substantial inflows, providing strong support for equity markets. 

Markets are currently dealing with multiple uncertainties simultaneously — geopolitics, tariffs, currency volatility and global growth concerns. Once some of those variables stabilise, conversations between issuers and investors on valuation will become more straightforward, creating a better environment for large listings.

 

Why have markets such as Taiwan and South Korea attracted more investor attention recently? 

Manufacturing-led economies have benefited enormously from the surge in global capital expenditure linked to AI and data centres. 

When global investment in these areas runs into trillions of dollars, countries embedded in manufacturing supply chains see demand rise dramatically. India’s growth model has traditionally been more services-led. 

The AI wave has strengthened manufacturing ecosystems in parts of Asia while simultaneously raising questions about the future economics of some service-based business models. 

That said, despite the challenges, the India opportunity is arguably larger than before. India today has strong liquidity, a healthy banking system, robust corporate balance sheets, functioning capital markets, improving governance standards and a credible legal framework. These factors provide resilience in a difficult global environment.

 

Will the massive AI and data-centre spending by hyperscalers directly benefit India? 

India is not currently positioned at the base of that manufacturing supply chain, so the direct benefits are limited. However, India is beginning to build substantial domestic data-centre infrastructure. Several large projects have been announced, and those investments will generate significant domestic capex opportunities.

 

Has India missed out on the China-plus-one opportunity? 

A large share of China-plus-one investments over the past two years has gone to Southeast Asian countries. One reason is that many China-plus-one strategies are being implemented by Chinese companies themselves as they seek to diversify their supply chains. Given the geopolitical relationship between India and China in recent years, India was not always the easiest destination for those companies to deploy capital. That equation is improving now, and therefore China-plus-one should be evaluated differently today than it would have been six months or two years ago.

 

Can India continue to outperform despite these global shifts? 

India’s market ultimately depends on domestic earnings growth. The country’s investment case is driven by domestic consumption, domestic spending and the broader domestic economy. 

Software services account for only about 11 per cent of India’s MSCI weight. The market’s direction depends much more on banks, industrial companies and other large domestic sectors than on technology alone.

 

What trends are you seeing in M&A activity? 

M&A activity across Asia remains active. From an Indian perspective, outbound acquisitions are being driven by companies seeking product capabilities, market access, geographic expansion and technological expertise. 

The volume may not be exceptionally large, but there will continue to be selective, strategically important transactions. Indian corporates today have healthy balance sheets, strong financial flexibility and access to capital, allowing them to pursue opportunities as they arise.

 

Which sectors are likely to see the most outbound M&A activity? 

Health care, automotive, robotics, advanced manufacturing and pharmaceuticals are all sectors where Indian companies have meaningful opportunities. Companies in the energy transition, as well as metals and mining, may also pursue acquisitions to secure resources such as copper, lithium and nickel.

 

What inbound investment themes are emerging in India? 

One notable trend over the past year has been significant investment in India’s banking and financial-services sector, particularly from Japan and West Asia. The attraction is straightforward: India’s banking system offers strong asset quality, healthy returns and favourable growth prospects linked to domestic consumption. Investors from countries with lower growth opportunities are naturally seeking exposure to those dynamics.

 

Is there strong foreign investor interest in Indian financial services? 

Yes, particularly among strategic investors and private-equity firms. However, banking is a highly regulated sector with ownership limits. More importantly, Indian banks are already well run, well capitalised and highly competitive. Foreign investors are not coming in because they believe they can transform these institutions. They are investing because they want long-term exposure to India’s growth story.