Global investors are pulling out of India’s stock market at an unprecedented pace, redirecting their capital toward Chinese equities. This shift marks a dramatic reversal in fortunes for the two Asian economic giants over the past six months.
Foreign investors have offloaded nearly $29 billion worth of Indian stocks since October, the highest withdrawal in any six-month period. In contrast, China has attracted fresh investment, with Hong Kong’s benchmark Hang Seng Index surging 36% since late September. Much of this interest has been driven by optimism surrounding artificial intelligence advancements, particularly by Chinese startup DeepSeek.
The decline in Indian stocks follows a hit to corporate earnings due to high inflation and elevated interest rates. Since reaching a record high in September, Indian equities have lost 13% of their value, wiping out approximately $1 trillion in market capitalization. Analysts suggest that India’s previously high valuations made it vulnerable to corrections once corporate earnings began to slow.
“When China gets flows, India doesn’t,” said Jitania Kandhari, deputy chief investment officer of Morgan Stanley Investment Management’s solutions and multi-asset group. Many fund managers who had favored India for the past few years are now trimming exposure to allocate funds toward China and other emerging markets.
Investment firms such as Morgan Stanley and Fidelity International, while still overweight on India, have been gradually reducing their holdings in the country. Nitin Mathur, associate investment director at Fidelity International, stated that the firm has become more cautious about India, adjusting its portfolio accordingly.
For the first time in two years, China holds a larger weight than India in the portfolio of Britain’s Aubrey Capital Management, which focuses on consumer-oriented companies. Portfolio manager Rob Brewis noted that profits earned from India’s strong market performance in recent years have been reallocated to China, Southeast Asia, and other regions.
India’s economic growth slowdown has also impacted investor sentiment. The country’s economy is projected to grow at its slowest pace in four years in the current financial year. Additionally, corporate earnings for the blue-chip Nifty 50 index rose by only 5% in the quarter ending December, marking the third consecutive quarter of single-digit growth after two years of double-digit increases.
India’s stock market had been “priced for perfection,” according to Anwiti Bahuguna, chief investment officer of global asset allocation at Northern Trust Asset Management. She explained that even a small decline in earnings expectations triggered a broader selloff. Despite the recent correction, India’s BSE Sensex remains priced at 20 times its projected 12-month earnings, compared to just seven times for the Hang Seng Index, according to LSEG data.
“There is still room for money to come out of India,” said Sammy Suzuki, head of emerging markets equities at AllianceBernstein, citing the pressure on expensive stocks amid declining earnings growth.
However, some investors remain optimistic about India’s long-term prospects. Ryan Dimas, portfolio specialist for William Blair’s global equity strategies, emphasized that India has one of the strongest economic backdrops among major markets, supported by multiple economic drivers and robust stock market fundamentals.
Morgan Stanley’s Kandhari predicts that an “inflection point” where foreign investment stabilizes in India is unlikely before the second half of 2025. Until then, China’s resurgence and economic policy support are expected to keep attracting global investment flows away from India.
