Explained: Why Foreign Investors Are Exiting India Amid Market & Rupee Concerns | The Numbers Game

Added: 2026-05-27

[00:00:00]Let's now come to the second part of the show. I started with fuel prices because that's what impacts consumers the most.

[00:00:06]Uh in the second part I want to deal with foreign investors and I have three charts I want to show you. The first and they largely make this point that foreign investors in the equity markets have been net sellers. They've been going to South Korea. They've been going to Taiwan. They've been investing in the United States. They haven't been coming to India. And therefore, foreign portfolio investments month on month have been in the negative. In May so far, they're down $3.1 billion. $3.1 billion have been taken away by foreign investors from the Indian markets. In March, it was a record $13.6 billion. In April, 7.56. And if you go back on this graph, you see uh starting December 2025, uh FBI has been flowing out of the country rather than coming. And even before that in a few months like May and in October of 25 more foreign money came in than went out in the equity markets but largely the graph has been negative.

[00:01:02]So a uh does it stay this way? Let me get Ratin Roy to kick off. Instead of taking all three graphics at the same time let's do it one by one. Foreign portfolio investors been so much talk about money being pulled out of the Indian markets by these foreign investors going to Taiwan going to South Korea going to the United States. How much of a concern as a macroeconomist?

[00:01:20]How concerned would you be about this Ratin Roy?

[00:01:24]>> Yeah, there there are three overlapping questions if you take this thing very calmly. First, we have to understand that there is no immediate macro economic danger even with a likely current account deficit of hundred billion which will entirely have to be financed by a diminition in reserves.

[00:01:42]Uh that is something that we will be able to manage this year and possibly the next. The larger question is we have to admit something which I found Indians have tended to paper over. India runs a structural current account deficit and that means that every the the reserves we have are not ours. They belong to someone else. So the moment that someone else decides for better or worse that India is not a place where they want to net net put in money the only way they can finance our current account deficit is by reducing reserves.

[00:02:14]This is a structural problem which I've been urging people to take notice of.

[00:02:18]But frankly, in our hubris, no one has done that. We are not like China. We don't run a balance of payment surplus.

[00:02:24]We don't run a current account surplus.

[00:02:27]And all that talk about, you know, the service account managing this and all that. Now it has all come to uh one small shock, mediumsiz shock even, has put our current account in a situation where we have to watch. There's no panic yet, but we will have to watch it. Now, what do we do? Inevitably there's the only things we can do is a combination of devaluation and trying to kick in the several potential measures government has taken in the macroeconomic plant including swaps and we can look at ways in which we can you know have in sort of good deal external commercial borrowings to come in to somewhat alleviate the dimunition in reserves uh so as to stem the problem. Now with the debt depreciation we do have a problem. The more you depreciate, the less attractive investing in India and dollars becomes.

[00:03:10]But the more you depreciate, the less urgent becomes the balance of payments difficulties. There's a path you have to walk. Not unsolvable. It's an equation.

[00:03:17]That's all. They're trade-offs. It's solvable. So I would say in some we will have to tolerate more devaluation than we have now. We will have to give up this school boy beg your pardon BJP RSS nonsense that's gone on for the last seven or eight years of strong rupee and a very foolish RBI policy in the early 20s of keeping the rupee strong bajut like some kind of dangal wrestler the rupee will find a level depending on its current account deficit we have to make sure that people don't short the rupee we have to make sure that there's no volatility and that the government of India has shown it's still capable of doing and I'm particularly happy with current RBI policy on the matter They've been calm. They've taken hits well and they have intervened when necessary, not ideologically. I was hoping to go to the rupee next, but you've jumped to it straight and the two are linked. So, let me just show what's been happening on the rupee now and uh the extent to which the devaluation can continue. And I want Haj Gupta to respond to it because the rupee is down about 5% and if you compare with other currencies uh it's more down than the Japanese yen uh more down than the euro the Saudi realal the dirham in the UAE etc. So the rupee is under pressure. The question Madu is and this is also part economics, part political. Ratino Roy says it should never be political. But if the rupee for example were to slip below 100 rupees, there would be an outcry. You can just imagine what Rahul Gandhi, the Congress and Trinamul and everybody else will say and this is what the BJP said while they were in opposition. Ratin Roy says just deal with the politics. Leave it on the side.

[00:04:49]Get on and do what you need to do with rupee. Is that even possible or do you think that's just frankly wishful thinking? Hush.

[00:04:58]uh Rahul I think it's not so much about uh the political aspect which I anyways I leave to the political experts to discuss I think the broader point is if you let the rupee depreciate too much a certain reflexivity kicks in and the problem at that particular point is foreign investors who are seeing their portfolio values going down in dollar terms then they jump onto the bandwagon and you have a vicious cycle so sometimes the markets overshoot and I think that's what Dr. Roy also acknowledged that the RBI's stated policy is to not target a particular rate but to make sure that volatility in the market is low. Uh I don't think the RBI or the government has had a strong rupee policy in the last 5 to 10 years.

[00:05:38]I mean if anything else the forex reserves have gone up in the last 5 to 10 years which means we are buying on balance FX reserves even adjusting for the short forward book. uh see uh if you look at all fundamental parameters adjusting for the dollar cycle adjusting for the fact that India's purchasing power parity GDP is now almost five times compared to its dollar GDP the rupees by all metrics actually uh undervalued and oversold the re the broader issue is because domestic flows have been very strong the FBI flows have been priced out just to correct you also Rahul in the in this year right year to date Korea has seen net outflows of foreigners ers. So why why is that?

[00:06:18]Because domestic money in Korea has also massively invested in Korea. So even though the narrative is Korea has done very well, it has but it has been a net sell as far as FBI are concerned. So the real issue is because we uh FDI and FBI on a net basis has gone to zero or negative in the last couple of years.

[00:06:38]What used to be an outflow on the current account but is substantively a capital account issue which is gold $72 billion last year or 2% of GDP now hurts much more. So earlier foreigners were diversifying into Indian asset and Indians were diversifying into gold. Now because the first part has stopped on a net basis partially because of strong domestic flows which on the whole is a good thing. The government has to take some macro potential measures not only about increasing the duty on gold but also enabling more internal recycling.

[00:07:07]So I think a cut on the capital gains tax for gold, more uh monetization schemes which have done not very well so far, more gold loans being encouraged, those are ideas which can really really close the gap because X gold India has been running a current account surplus for a long time and I don't think this point is acknowledged enough. Okay, >> Dave Name, I want to show two sets of uh data. One is to do with the market capitalization of the Indian stock markets where India was number four globally has now slipped to number six and South Korea is now quite close to potentially can overtake as well.

[00:07:41]Taiwan's gone ahead of India and so there you have it on your screen right now in trillion US dollars India versus the others. So India had gone to number four now being overtaken by Taiwan and Hong Kong slipping now below Japan below Hong Kong below Taiwan uh to number six.

[00:07:57]Second is the fact that the price earning multiples of the Indian stock markets are still more relative to other uh other other comparable markets. So this is the nifty which has largely been rangebound since July 24 for example from about 24,141 to about 23,97 actually seeing very serious downward pressure. So this is one because it affects potentially the psyche of the Indian domestic investor who so far thought it's almost like a fixed deposit dnamera that you do an SIP and that there's so much advertising around it as well that you do an SIP it goes to the Indian markets the Indian markets are strong they'll help you grow this is what you need to do at what point do you think those assumptions come under stress and domestic investors start getting very you've got the foreign investors very already how what's your understanding of the mental makeup of the domestic investors the small SI P investors as a group as a cohort.

[00:08:54]>> So Rahul first of all I love the fact that whatever happens in the market we find a neat little narrative to fit this. So the India's P ratio is far higher in 2024 but 2024 everybody thought uh you know money was there for the making and every all my fellow fund managers were uh sort of uh hawking the quote unquote India growth story now you know people are launching gift city funds and saying go global uh but neither extreme is quite correct and uh yes India was about 4.7% of the world's market cap it is now sub 3%. uh but the thing to remember in all of this is that sentiment is a contraindicator and this is not my opinion this is research studies around the world that it is when you are feeling that money is very easy to make when the general sentiment is of buoyancy as I said in 2024 there were people who came to me and said you know I'm not looking for unrealistic uh returns 30% compounded is fine by me said that is an unrealistic expectation but at that time nobody wants to here that manage risk and look at this and all that. Now you're going to the other extreme and say that should I stop my SIPs. The equity markets are never FDs.

[00:10:13]So that's any every equity investor should remember that equity returns are not predictable on a 1 2 3ear basis. And uh people think equity being volatile means that one year I'll make 25% and the next year I'll make 15%. No, next year you can make minus 30 also. So that's the nature of equity markets. Uh but as I said, sentiment is a contraindicator and the very fact that there are so many TV programs nowadays enumerating the risks in the market is the reason why the next period returns may well be at least in probability terms higher than normal. saying P is higher or what is the P even relative to our own history is not very meaningful because unless you adjust for the fact that of the sectoral differences so India alone if you look at the Nifty and Sensex uh you know 20 25 years ago there were no banks now banks are the highest weightage at one point these indices were full of PSUs then in between 15 years we forgot that PSUs were even listed so but if you look at sectorally we are not at extreme ends of the valuation uh spectrum either versus history or I mean cross country PS don't make a whole lot of sense but to whatever extent you want to look at that uh so I would say that what you know for uh the retail investor never be 100% in equities not even if you are 25 and in a good job and uh but whatever is your equity allocation most of the time it makes sense to remain invested and certainly I I don't think we are at an extreme end where you should get out of the market.

[00:11:53]>> Sujitala uh the fact is that foreign portfolio investors have largely been shying away from investing in India outflows more than inflows month after month for the last several months. What are your recommendations to regulators and to government and can anything be done at this moment to change that or do you think that because of what's happening in West Asia because of what's happening with the AI super cycle that there's very little that this government can do or can it to try and change that at this moment here and now? Sujit Balam.

[00:12:22]>> Yeah. So absolutely look I think uh my at least my policy recommendations and how I look at India and the world has nothing to do with West Asia. This is a crisis. This is a global crisis and whatever forecast anybody makes is bound to be wrong a weekend or two weeks hence. So it's this is not the time to uh look at whether RP valuations are there or whatever. Um that's for the market analysts. Now one fact remains and that is that are we has our economy followed basic fundamentals. Now in terms of basic fundamentals I want to politely disagree with my good friend Ratan Roy about the current account deficit. Look, if you are a growing economy and you are the developing economy, having a current account deficit is absolutely necessary. It adds to your investment. What we need is higher growth and we are at a stage where we can uh promise and look for higher growth.

[00:13:38]So current account deficit is not the problem. Second is the rupee a problem?

[00:13:44]As hashed rightly said, there is no metric that shows that the rupee is overvalued. All metrics show that the rupee is undervalued. Third thing, why is there a problem with the rupee or with foreigners selling Indian assets prior to February of 2025?

[00:14:08]And that's where I think our fundamentals are a little bit off.

[00:14:14]We want growth. For growth, the portfolio investors, FBI, that's important. And you know, I once was also a stock market investor and manager etc. And those things fluctuate and sometimes it gets overvalued, sometimes it gets undervalued and life goes on. However, FDI is genuine investment which helps the growth process, which helps technology absorption, which helps connect you to the value chains, which takes you helps you take to the frontier.

[00:14:56]That is where we have I think messed up in that we have not encouraged foreign investment. Matter of fact, foreign direct investment I'm now talking about.

[00:15:07]Matter of fact, we've discouraged foreign direct investment until we get that and mind you, you know, this idea that okay, uh, the lupy can find its right level, let it fluctuate. I don't buy that at all at all. So change, find out this problem existed before December, before February of this year.

[00:15:28]So look at what were the problems before February of this year and then address policy accordingly and one of the things you will find in space is that we have messed up in terms of foreign direct investment. Last point I would like to make. So much so that even the government admits and the finance minister last year in February made a public announcement in the budget as to that we are taking a reook at our policy on foreign direct investment. So it's the government recognizes it just like all of us recognize that the manu share of manufacturing to GDP has to go up from 13 to 15%. I've been hearing it from all political parties, from all economists that we need to raise this.

[00:16:26]It doesn't happen. Hasn't >> that's a very important point you make and I want to get hush Gupta to respond to it. The fact that you know there is an understanding that foreign investors at this moment are not very hot in the Indian economy and there's a need to address that is well understood by all policy makers we talk to. The likes of Sujit Bala argue that here is a crisis.

[00:16:46]use the crisis and opportunity and do something about it. So while we are hearing all the right noises, he's arguing that we aren't seeing enough action because you know money is money.

[00:16:56]You can't talk someone, you can't bully someone, you coers someone into investing. If he sees the value in coming in, he'll do so otherwise he'll bounce. It's as simple as that. You can't talk him into investing. So therefore, he's saying that we're talking or we're not doing. Respond to that. Hush.

[00:17:09]>> No.

[00:17:12]No Rahul, you're right. And I agree with Dr. Bala. He's talking about the bilateral investment treaties which Raman ma'am had spoken about in budget that she'll actually review and we are yet to see that process and of course that would further help in terms of we should have an open debate whether we want the forum to be international arbitration out of the Indian courts and Indian courts obviously have problems so on that point I agree with Dr. I would simply add a nuance that nonetheless the reality is we did see record gross FDI flows in FI26 and $95 billion. It's the repatriation that has been high and you know Sajjit Chinoi has spoken about global interest rates. It's also the reality that Indian companies are becoming global multinationals. So it's not like technology absorption and FDI is not happening but I agree with Dr. Bala more can happen on the private capex point uh Rahul that you mentioned is another point I'd actually agree with Dr. Balai who had earlier written uh two or 3 months ago that Indian real interest rates is fact before the war.

[00:18:08]So right now it's temporarily perhaps not that much applicable but Indian real interest rates some of the highest in the world. For example the Vietnam 10y is around 4%, 4 and a.5% we are at 7%.

[00:18:19]So you are not going to get private capex if there is no demand uh aggregation and uh stimulus thereof. if you don't see capacity utilization going from the mid70s to the high7s to the early 80s when you have first brownfield then greenfield capex so I think the government and the RBI were going towards in that direction the RBI cut 125 basis point and my numbers my research shows that actually capex did uh deliver uh uh a positive surprise last year except in the sector of telecom so it's not also the case that private tele private capex is not happening but it could happen much more right now we are in the range of around 10% of GDP in terms of private corporate capex at its peak in the 2007 it was around 17% although it was there only for a couple of sectors so there is clearly scope for Indian private sector to spend more uh for that we need more demand impulse on the macro side and I would also say we need to think more creatively about industrial policy so >> okay DNA respond to this because as you speak to members in government dealing with economic policy they're constantly urging private companies to go out and invest war on balance that hasn't happened and that creates a lot of distress within the finance ministry.

[00:19:30]you know policy mandarins unhappy with that but if you speak to industrialists they largely say that this West Asia crisis creates uncertainty about what will happen in the future and therefore they're not saying they'll not invest ever but they're in a wait and watch kind of mode and you can't really blame them because you don't know how long this war goes on for in what form and shape it ends what the future looks like that's not known and therefore what do you suggest be done to deal with the fact that you're now in this situation where you've got an uncertain period when the war gets over you've got a government that is desperate for private investment across across all sectors along across all kind of groups to kick off and that's not really happening at this moment.

[00:20:10]>> So I mean we are bringing it all down to the West Asia war which is not even you know a few months old. Uh but this is a more structural thing than that. If you look at this is something I've been speaking about for the last 3 years that we our GDP has been running on a single engine of government spending. I mean that has been clear as daylight. In 2324 our private consumption went down to a 21-year low. Uh our manufacturing the percentage of GDP in spite of the PLI scheme and all of that is at historic lows. It is at levels which was last there in the 1960s.

[00:20:48]uh so I mean some of the actually some of the um I think you know what we call reforms uh I don't think we monitor it against what the results are so if you have a PLI scheme is it for investment is it for employment is it for getting technology so when we are giving chunky subsidies to you know some large company to at land at 20% of the market price and all that what are we getting in return and as far as the currency and investments into India is concerned.

[00:21:20]Also remember one fact that our interest rate differential that interest rates in India how much are they higher than interest rates in let us say US and Europe that is at a low several decades low I mean we are talking of a differential of two 2 and 1/2% uh over let us say US rates whereas uh the norm used to be five 5 1/2% and the highs were around 7% point so obviously when you know your interest rates are only a bit higher than the US, it becomes less attractive to invest here which also creates a pressure on the currency which I don't find people talking about explicitly. As far as private investment is concerned again for example we gave this corporate tax cut 8 n years ago.

[00:22:09]Now who are the large corporate taxpayers? There are three categories.

[00:22:12]There's banks, there's PSUs and there are MNC's which are mainly in consumer goods. None of those people are going to invest. None of those companies are going to invest because you gave them a tax cut because those are not the investing companies. So if you wanted money going into investment, you could have given more specific uh incentives for investments which have happened in direct taxes in the past. So I think little more focus on what is the you know what is the agenda what are we trying to what is the goal and whether that policy is moving you towards that goal.