FII revival in India hinges on new growth engines, Bernstein says
Bernstein says large-scale FII returns to Indian equities are unlikely without new engines of competitiveness such as semiconductors, batteries and energy storage.
Foreign institutional investors are unlikely to return to Indian equities in large numbers even after the artificial intelligence trade peaks, according to a Bernstein report. A sustained revival in foreign inflows would instead depend on India building globally competitive industries in areas such as semiconductors, batteries and energy storage.
The brokerage expects FII flows to remain flat to modestly positive over the next 12 months. It cautioned, however, that any improvement would largely reflect an easing of recent headwinds rather than a meaningful change in the factors that shape long-term foreign investment decisions.
A structural recovery, the report said, would require India to create new engines of competitiveness, innovation and global relevance. It pointed to the need for greater capabilities in advanced semiconductor manufacturing, batteries and energy storage, energy self-sufficiency, and businesses able to capture meaningful market share worldwide.
Bernstein acknowledged early signs of progress in space, defence, semiconductors and deep-tech, but said most of these sectors remain too small to materially influence global capital allocation.
The assessment follows a sharp shift in foreign investment patterns. FIIs have pulled out USD 40 billion from Indian equities over the last two years, with combined outflows of USD 56.3 billion over the past 24 months. That compares with inflows of USD 38.6 billion in the preceding 24-month period.
According to the report, the traditional relationship between FII flows and India's economic growth has weakened, and the earlier link with interest-rate differentials between India and the US has also faded. Currency movements, relative valuations and forward earnings revisions have become more important drivers for foreign investors.
The brokerage flagged the rupee's performance as an increasingly significant factor, noting that the correlation between FII flows and the currency has risen above 70 per cent in recent years. This, it said, may indicate that rupee weakness is weighing on foreign investment returns in US dollar terms.
High valuations are also making it harder to attract foreign capital, with Bernstein's analysis showing that rising relative valuations have coincided with weaker FII flows in recent years. The report added that foreign investors are not simply waiting for current uncertainties to settle before returning to India. Sustained FII participation will depend on the country creating a new generation of globally competitive companies.