$115 Billion FII Opportunity: Why Global Investors May Still Choose India

India’s equity market is entering an unusual phase. It is not competing with Taiwan, South Korea or Japan on AI earnings, and institutions increasingly acknowledge that it cannot match the 40% to more than 100% earnings growth being generated by parts of the Asian AI complex. That difference may actually work in India’s favour.

J.P. Morgan estimates that closing the gap between current foreign exposure and benchmark weights could represent around $115 billion of potential net inflows. That does not mean $115 billion will necessarily enter India. It is the amount that could potentially be deployed if global investors bring their underweight positions back toward benchmark levels.

However, important conditions attach to the outcome. Oil has moved above $100 per barrel, Indian inflation has accelerated, global bond yields remain elevated and the Federal Reserve has resumed tightening. These factors could reduce some of the macro flexibility that makes India attractive as a diversification trade.

The investment question this article poses is whether an improving earnings cycle and a possible normalization of foreign flows can offset the pressure from oil, global yields, inflation and valuations.

India is becoming a relative opportunity

Asian equities increasingly have two distinct earnings engines. Taiwan, South Korea and parts of Japan are benefiting from AI infrastructure, semiconductors, data centres and related capital expenditure. J.P. Morgan estimates that earnings growth in these AI-driven markets is running from approximately 40% to more than 100%, levels India is unlikely to replicate.

India’s earnings story is different. It is being driven mainly by domestic consumption, financials, infrastructure, industrial activity and other non-AI areas. That creates an interesting portfolio-construction argument. As AI exposure becomes more concentrated, investors may seek diversification. That creates demand for a large and liquid non-AI market, and India is one of the few realistic destinations.

J.P. Morgan describes India as the world’s largest liquid non-AI hedge and points to its approximately 12% weight in MSCI EM as one reason it can absorb meaningful allocations. Southeast Asia, Latin America and emerging Europe also provide non-AI exposure, but their smaller market sizes make them less capable of absorbing very large reallocations.

India’s missing engine, earnings, is finally returning

For almost two years, India’s valuation story had a problem. Earnings were not keeping pace with expectations. That is beginning to change. J.P. Morgan says mid- and small-cap companies have delivered 25% or more earnings growth for six to seven consecutive quarters, while large caps have now posted double-digit growth for the last two quarters. Excluding oil marketing companies, large-cap earnings growth rises into the high teens.

Barclays sees a similar broadening. Revenue growth in the three months through June was the strongest in three years, profit growth remained in double digits and 20 of 31 sectors beat expectations. Barclays says earnings estimates for its broader coverage universe were raised for the first time in more than three years.

Nippon India Investment Managers also points to improving auto volumes, consumer-staples demand and bank credit growth as signs of a broader recovery in economic activity. It argues that previous GST and income-tax reductions are beginning to support consumption and business activity.

This matters because foreign investors need more than a cheap market. They need earnings visibility. The process is relatively straightforward. An earnings recovery can stabilize or raise EPS estimates, making valuations easier to justify. That can encourage foreign investors to rebuild positions, and additional FII flows can then reinforce the rerating.

J.P. Morgan remains relatively conservative, however, retaining an FY27 earnings-growth forecast of around 10.4% to 11% because tax-cut tailwinds are fading and higher oil prices remain a risk. Goldman Sachs is also more cautious than the headline recovery suggests. Its India research forecasts approximately 8% profit growth in 2026 and 13% in 2027, below consensus expectations, with higher energy and currency costs weighing on margins. The earnings recovery is therefore becoming clearer, but its eventual scale is still uncertain.

The $115 billion question: where would the foreign money come from?

This is one of the most important parts of the thesis. J.P. Morgan says India moved from a long-standing EM and Asia ex-Japan overweight to an underweight during the previous two years as valuations remained high while earnings weakened. Foreign ownership of large caps subsequently fell from approximately 24% in December 2020 to 17.6% in mid-2026, its lowest level in more than a decade.

That leaves three important conditions. Indian earnings are improving, domestic liquidity remains strong and foreign ownership is depressed. The next phase of the cycle therefore does not necessarily require another domestic savings boom. It could come from foreign positioning normalisation.

There is already some evidence of that shift. J.P. Morgan says foreign investors became net buyers for a second consecutive month, with approximately $2.5 billion of inflows in July and $3 billion in August. DIIs, meanwhile, remained net buyers for the 37th consecutive month and invested roughly $6 billion in August.

Nippon India’s August data similarly shows FII inflows of approximately $2.96 billion, while DII inflows reached around $6.1 billion. The domestic investor base has therefore changed the structure of India’s market.

Foreign selling no longer automatically produces an equivalent market decline because domestic institutions have become a much larger source of demand. Reuters estimates that India absorbed approximately $48 billion of foreign investment outflows over 18 months with considerably less market damage than might previously have been expected, partly because domestic flows remained resilient.

Primary-market supply is absorbing part of that liquidity

There is an important complication. India is attracting capital while Indian companies are also raising large amounts of it. J.P. Morgan says August saw approximately $12.7 billion of fundraising through IPOs, placements and stake sales, creating a significant drain on secondary-market liquidity.

The amount of liquidity available to existing stocks therefore depends on how much money is coming from FIIs and DIIs and how much is being absorbed by IPOs and offers for sale. That distinction matters now.

The $2.3 billion NSE IPO has been fully subscribed, while India’s primary market remains active. Reuters notes that the heavy IPO calendar is currently limiting upside alongside elevated crude prices. Foreign-flow normalization could therefore support new issuance before it produces a broad rerating in existing stocks.

Oil has become the biggest threat

The macro backdrop has changed materially from the environment in which the AI-hedge argument first became attractive. Brent is currently above $100 per barrel, while India’s August CPI inflation rose to 4.82%, with food inflation at 5.95%.

That creates a direct problem for India. Higher oil prices increase India’s import bill. A larger import bill can widen the current-account deficit and put pressure on the rupee. A weaker rupee can increase imported inflation, which can reduce the RBI’s flexibility. Higher domestic rates can then increase equity discount rates and put pressure on valuations.

J.P. Morgan estimates that every $10 per barrel increase in oil worsens India’s current-account deficit by around 0.5% of GDP. Its base case already sees the FY27 current-account deficit widening to around $55 billion, or 1.4% of GDP, from approximately $25 billion previously.

Barclays reaches a similar conclusion from the currency market. Despite a softer dollar and stronger currencies across many emerging markets, the rupee remains weak. That suggests India’s pressure is increasingly coming from energy imports and the external balance, rather than simply from dollar strength. The current market is therefore testing the AI-hedge thesis at the same time that the argument is gaining attention.

Global bond yields could decide whether FII rotation continues

The second major macro risk is global duration. Barclays says the August surge in US, Japanese and UK long-term yields was driven more by higher term premiums, fiscal borrowing and demand for compensation for holding duration than by fears of an imminent global recession.

That distinction matters for India. If yields rise because global growth is collapsing, India may still offer relative protection. If yields rise because investors demand greater compensation for fiscal risk and inflation, emerging-market equity valuations can remain under pressure even when earnings are improving.

The recent environment illustrates the problem. The Federal Reserve has resumed rate hikes, while US 2-year and 10-year yields have risen sharply. Markets are also pricing further tightening risks. Higher US yields can narrow the India-US rate differential and make RBI easing more difficult. Tighter financing conditions can then put pressure on equity multiples. This is why Barclays says the medium-term Indian equity story remains intact but valuation discipline and selectivity matter more than broad-market exposure.

 El Niño adds a domestic inflation risk

J.P. Morgan identifies El Niño as another major variable for India’s 2026-27 outlook. A stronger El Niño can weaken the monsoon, affecting agricultural production and food prices. That matters because food carries a large weight in India’s inflation basket.

A weaker monsoon can increase food inflation, raise the risk of RBI tightening, weaken rural consumption and eventually put pressure on earnings. The latest inflation data makes this risk more relevant. August food inflation accelerated to 5.95%, while economists have warned that El Niño and monsoon uncertainty could keep inflation elevated.

J.P. Morgan nevertheless notes that the market response to previous Super El Niño years, 2015 and 2023, was not uniformly negative. Defensive and consumption sectors initially performed better before cyclicals and utilities took over later.

Where would the rotation actually go?

Banks and financials

Banks and mid-sized financials are among the clearer institutional themes. Barclays prefers banks and mid-sized financials as credit growth strengthens and credit costs remain contained.

Foreign flows into Indian banking stocks also recovered sharply earlier in 2026. FPIs bought approximately ₹14,634 crore of banking stocks in the second half of June. The reason is that a stronger domestic credit cycle can lead to loan growth, improving earnings and eventually a recovery in foreign positioning. The risk is that higher rates eventually slow credit demand and compress valuations.

Consumer discretionary and services

J.P. Morgan says recent foreign buying has concentrated in consumer services, e-commerce and hotels, along with metals, mining and healthcare. That fits the AI-hedge argument. If global investors want exposure to India’s domestic-growth economy rather than AI infrastructure, discretionary consumption and services are direct ways to express that view. HSBC also favours consumer discretionary among its Indian sector preferences.

Metals and mining

Metals and mining have also attracted recent foreign buying, according to J.P. Morgan. This is more cyclical than the traditional domestic-growth argument, but it provides another source of earnings exposure outside technology and AI. The main risk is that metals remain dependent on Chinese demand, global manufacturing and commodity prices.

Healthcare

Healthcare is another sector where recent foreign buying has been visible. It offers a more defensive combination of domestic and global earnings exposure without requiring investors to take direct AI-semiconductor risk.

Technology

This is where the picture becomes more nuanced. India’s IT sector is not automatically a loser simply because India is being positioned as an AI hedge. Goldman Sachs argues that Indian IT services can eventually benefit from AI adoption because Indian companies are increasingly positioned to help enterprises implement and operationalize AI. It also acknowledges that current IT spending is undergoing a cyclical slowdown.

Barclays similarly sees stronger performance from mid-tier technology compared with large-cap IT. The distinction is important. AI hardware beneficiaries and Indian IT services companies are exposed to different parts of the AI investment cycle. India’s AI opportunity may be more about implementation, integration and enterprise services than semiconductor earnings.

Why India may not become the AI hedge

The strongest challenge comes from Neuberger Berman. It downgraded India to Neutral in Q3 2026, citing a widening current-account deficit, negative foreign portfolio investment, elevated real lending rates, declining FX reserves and weakening earnings estimates. It also noted that Korea and Taiwan provide direct AI exposure while India does not.

HSBC provides another counterargument. It upgraded India from Underweight to Neutral when oil prices fell and foreign flows returned, but warned that the sustainability of foreign inflows remained uncertain if global investors returned to AI-focused markets.

That is the central weakness in the AI-hedge thesis. If investors are only temporarily reducing AI exposure, India could benefit. If AI remains the dominant source of global earnings growth, investors may continue preferring Taiwan and Korea. And if an AI sell-off is triggered by higher oil, inflation and global rates, India could be affected by those same macro forces.

The $115 billion is an opportunity, not a forecast

India’s potential foreign-flow opportunity rests on three developments. First, earnings are recovering. Mid- and small-cap earnings have already improved, while large caps are now joining the recovery. Barclays’ data showing 20 of 31 sectors beating expectations supports the view that the improvement is becoming broader.

Second, foreign positioning remains unusually low. Large-cap foreign ownership of 17.6% is substantially below its 24% peak in December 2020. That leaves a potential positioning gap if global investors rebuild their India exposure. Third, India is one of the few large liquid markets that offers non-AI exposure. That is the core of the J.P. Morgan thesis.

The potential $115 billion should not be interpreted as a guaranteed inflow. It represents the size of the potential allocation gap. Whether that gap closes will depend heavily on oil, global bond yields, the rupee, inflation and India’s relative earnings performance versus AI-heavy markets.

The current environment makes the debate particularly relevant. Brent is above $100, Indian inflation has accelerated, the rupee remains under pressure and global yields are elevated. At the same time, foreign buying has returned, domestic institutional flows remain strong and corporate earnings are broadening.

India’s case therefore does not depend on having better AI exposure than Taiwan or Korea. The argument is that global investors may want an alternative to AI-heavy markets, and India offers the scale, liquidity and domestic earnings base to provide it.

For Indian equities over the next 12 to 18 months, the central issue is whether global investors increasingly need an alternative to the AI-heavy markets and whether India’s improving earnings cycle is strong enough to absorb that capital if it arrives.

The key monitorables from here are therefore: