Challenges for FIIs in Reinvesting in Indian Stocks Post-AI Boom
Foreign investors are likely to remain cautious about Indian stocks, even as the artificial intelligence (AI) trade reaches its peak, according to brokerage firm Bernstein. The firm indicated that foreign institutional investors (FIIs) will not return in significant numbers unless India develops industries capable of competing on a global scale. This need for new growth engines is crucial for a sustained recovery in foreign investment.
Bernstein projects that FII flows will remain flat to slightly positive over the next year. However, this trend is expected to reflect a reduction in recent pressures on foreign investors rather than a substantial improvement in the long-term factors influencing their investment decisions. The brokerage emphasized that a resurgence in FII interest is contingent on India creating “new engines of competitiveness, innovation, and global relevance.”
To attract foreign capital consistently, India must enhance its capabilities in sectors such as advanced semiconductor manufacturing, energy storage, and energy self-sufficiency. Bernstein noted that while there are early signs of progress in areas like space, defense, and deep-tech, these sectors are still too small to significantly influence global investment patterns.
The comments come in light of a notable shift in foreign investment flows into Indian equities, with FIIs withdrawing $40 billion over the past two years. In total, FIIs recorded outflows of $56.3 billion in the last 24 months, contrasting sharply with inflows of $38.6 billion in the preceding two years. Bernstein observed that the connection between India’s economic growth and FII flows has weakened, as has the relationship between interest rate differentials between India and the U.S.
Currently, foreign investors are focusing more on currency movements, relative valuations, and changes in expected earnings. The rupee’s performance has become a significant factor in FII flows, with Bernstein reporting that the correlation between FII flows and the currency has risen above 70% in recent years. A weaker rupee can diminish returns for foreign investors when measured in U.S. dollar terms. Additionally, high valuations have emerged as a challenge, with Bernstein noting that rising relative valuations have coincided with weaker FII flows, complicating efforts to attract foreign capital.
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