Why Are FIIs Increasingly Bearish on India Compared to Other Asian Markets?

8bit Market News Desk
Mar 24
4 min read

Executive Summary Foreign Institutional Investors (FIIs) have accelerated their selling in Indian equities in 2026, with net outflows exceeding $11.2 billion year-to-date (approximately ₹1 lakh crore). This contrasts sharply with net inflows into other major Asian markets such as Taiwan (+$8.4 billion), Japan (+$6.8 billion), South Korea (+$5.2 billion), and Hong Kong (+$2.5 billion).

Indian benchmark indices have declined approximately 11.6% YTD (as of 20 March 2026), while several peer markets have delivered positive returns despite the shared headwinds from the Middle East conflict.

Key drivers of FII bearishness on India include lofty valuations (Nifty 50 trading at ~20x trailing P/E), rupee depreciation (–4.2% YTD), easy exit liquidity from domestic inflows, and India’s limited direct participation in the global AI supply chain. This report examines the data, comparative performance, underlying reasons, and implications for Indian investors and policymakers.

FII Flow Trends in 2026: India vs. Peer Asian Markets

FII activity in 2026 reveals a clear divergence. While India has witnessed persistent net selling, other Asian economies have attracted fresh capital, particularly those positioned in the AI and semiconductor ecosystem.

Comparative FII Flows and Returns (as of 20 March 2026)

Market	2026 FII Flow ($ billion)	March 2026 FII Flow ($ billion)	YTD Return (%)
India	–11.2	–9.5	–11.6
Japan	+6.8	–1.1	+1.5
South Korea	+5.2	–2.1	+36.0
Taiwan	+8.4	–1.4	+15.9
Hong Kong	+2.5	+0.8	–1.5

Source: Market data compiled as of 20 March 2026.

March alone saw accelerated selling across most markets due to rising crude oil prices and geopolitical tensions, yet India’s outflows remain disproportionately large. Cumulative selling in India crossed ₹88,000 crore in March 2026, contributing to a total 2026 outflow of over ₹1 lakh crore.

Performance Context Amid Regional Headwinds

The ongoing Middle East conflict has raised energy prices and inflation concerns across Asia. Despite this common pressure:

South Korea and Taiwan posted strong positive returns, driven by AI-related stocks (Samsung, SK Hynix, TSMC).
Japan benefited from expansionary monetary measures.
Hong Kong managed modest inflows despite property-sector risks.

In contrast, India’s equity markets turned negative, with the Nifty 50 down ~12% YTD. Domestic liquidity has absorbed much of the selling pressure, but the sustained FII exit signals deeper structural concerns.

Key Reasons for FII Bearishness on India

Easy Exit Enabled by Domestic Liquidity Indian markets benefit from consistent domestic inflows via Systematic Investment Plans (SIPs) and lump-sum investments. Mutual funds have absorbed over ₹29,000 crore monthly through SIPs alone, even during 18 months of muted returns. This deep liquidity pool allows FIIs to exit positions with minimal market impact and reallocate capital to global bonds or other equities.

Missing the Global AI Trade FIIs are aggressively allocating to the AI supply chain. Taiwan (TSMC), South Korea (Samsung, SK Hynix), and the US dominate semiconductor and AI hardware production. India, while a major consumer and adopter of AI, lacks significant upstream presence. Indian IT firms are investing in AI capabilities, but tangible earnings impact remains limited. This structural gap has made India less attractive versus AI-exposed peers.

Currency Depreciation Erosion The Indian rupee depreciated 4.2% against the USD in 2026, further diminishing USD-denominated returns for foreign investors. Comparative depreciation:

South Korean Won: –2.8%
Japanese Yen: –1.5%

Currency stability in peer markets has helped preserve portfolio returns, while rupee weakness has compounded India’s underperformance.

Valuation Premium Even after recent corrections, the Nifty 50 trades at approximately 20x trailing twelve-month (TTM) earnings. Japan and Hong Kong trade below 20x, offering more attractive entry points. While South Korea and Taiwan command higher valuations, these are justified by dominant AI growth narratives. India’s premium valuation without corresponding high-growth themes has made it appear “expensive” in global portfolios.

Additional Macro Triggers Impending inflation, higher energy import costs from the Middle East crisis, and slower earnings visibility have reinforced FII caution.

Implications for Indian Investors and Markets

Short-term pressure: Continued FII selling could keep indices volatile, especially if crude oil remains elevated.
Domestic resilience: Strong SIP flows and retail participation provide a buffer, but over-reliance on domestic liquidity may mask underlying valuation risks.
Long-term opportunity: A sustained correction could bring valuations closer to historical averages, potentially attracting fresh capital once geopolitical tensions ease and AI adoption in India translates into earnings growth.
Policy angle: Measures to deepen India’s semiconductor and AI manufacturing ecosystem could narrow the structural gap with Taiwan and South Korea.

Conclusion and Outlook

Lofty valuations, currency depreciation, abundant domestic liquidity enabling easy exits, and limited direct exposure to the AI megatrend have collectively made India less competitive in FII portfolios compared to other Asian markets in 2026. While the Middle East conflict affects the entire region, India’s unique combination of factors has amplified outflows.

Investors should monitor rupee stability, oil prices, and quarterly earnings from AI-adopting Indian companies. A tactical reduction in exposure or selective buying on further weakness may be prudent, while long-term investors can view the current correction as a potential re-entry opportunity once valuations normalize.

Report prepared based on latest market intelligence (as of 23 March 2026). This analysis is for informational purposes and does not constitute investment advice. Always consult a qualified financial advisor before making portfolio decisions.