Foreign Investors Shun India as China's Allure Grows

The shifting sands of global investment are revealing a stark contrast between two of the world's most populous nations: India and China. As foreign institutional investors (FIIs) increasingly turn their backs on India, they are drawn to China with an almost magnetic pull. This phenomenon is not merely a fleeting trend but a reflection of deeper economic and geopolitical currents that are reshaping the global financial landscape.



The Paradox of Indian Growth

India, once hailed as the next economic powerhouse, is now grappling with a paradox of growth. Despite strong economic fundamentals and relatively cheaper valuations, India has been witnessing sustained FII selling. This trend is primarily driven by global macroeconomic shifts and investor sentiment toward emerging markets. The persistent foreign institutional investor (FII) outflows have raised concerns among Indian market participants, with many wondering when the selling spree might end. Despite strong economic fundamentals and relatively cheaper valuations, India has been witnessing sustained FII selling, primarily driven by global macroeconomic shifts and investor sentiment toward emerging markets.

The high valuations in the Indian market are a key factor holding back FIIs from significantly increasing their exposure. Mark Matthews of Bank Julius Baer & Co. noted that "Indian markets have gone up too much and are very expensive," which makes FIIs cautious about investing heavily in the current environment. This caution is further supported by the fact that domestic institutional investors (DIIs) are likely to continue driving market flows, with FIIs taking a more cautious stance due to valuation concerns.

Additionally, inflationary pressures in India are another factor that influences FII decisions. Arul Selvan of Cholamandalam Investment pointed out that the Reserve Bank of India (RBI) may hold off on rate cuts to address domestic inflationary pressures. This means that FIIs may be hesitant to invest in India until there is a clearer indication of how the RBI will manage inflation, which could impact the overall economic stability and growth prospects of the country.

China's Economic Resilience

In contrast, China's economic performance in 2024 saw a return to steady growth, achieving a 5 percent GDP expansion. This outcome was largely bolstered by stimulus measures that helped drive a stronger-than-expected fourth-quarter recovery. China's GDP in 2024 reached RMB 134.91 trillion (US$18.80 trillion), maintaining its position as the second-largest economy in the world, behind only the United States. This reflects a year-on-year growth of 5.0 percent, in line with the government’s official target of “around 5 percent“ set during the 2024 Two Sessions.

China's strategic initiatives, such as the Belt and Road Initiative (BRI), have played a pivotal role in creating new markets for Chinese companies and strengthening economic ties with participating countries. The BRI has facilitated the creation of close economic ties with numerous countries, with Chinese financial institutions allocating 780 billion yuan ($109.23 billion) to finance projects associated with the initiative. This has resulted in a 24-rank jump for China's "good relations with other countries" in the 2025 Global Soft Power Index by Brand Finance. The BRI has also bolstered China's brand as a leader in energy innovation and sustainable development, as seen with the State Grid Corporation of China (SGCC), which has strengthened China's overseas energy programs and developed critical energy infrastructure projects across participating countries.

The Role of Global Macroeconomic Trends

Global macroeconomic trends, including interest rate movements and geopolitical uncertainties, significantly impact FII flows into emerging markets like India and China. These trends influence investor sentiment and decision-making processes, shaping the flow of capital into these markets.

Interest rate movements, particularly those by the US Federal Reserve, play a crucial role in determining FII flows. For instance, a 50 basis points rate cut by the US Federal Reserve typically encourages flows into riskier emerging markets such as India. However, high valuations in the Indian market have held back FIIs from significantly increasing their exposure. Mark Matthews of Bank Julius Baer & Co noted that "Indian markets have gone up too much and are very expensive," which has led to a more cautious stance by FIIs despite the rate cut. This highlights how interest rate movements, coupled with market valuations, influence FII decisions.

Geopolitical uncertainties also create an environment of ambiguity, negatively impacting investor sentiment. For example, the persistent foreign institutional investor (FII) outflows from India have been driven by global macroeconomic shifts and investor sentiment toward emerging markets. Nilesh Shah, Managing Director of Kotak Mahindra Asset Management, attributed the recent wave of FII outflows to US-based investors pulling capital back home due to expectations of tax cuts, tariffs, and protectionist policies under the 'Make America Great Again' campaign. He stated, "Selling is driven by US-based FPIs who are taking money back to the US on the promises of tax rate cuts, on the promises of tariffs and Make America Great Again." This shows how geopolitical uncertainties and policy shifts in major economies can lead to capital outflows from emerging markets.

The Future of FII Flows

The evolution of these trends will continue to influence future investment decisions. For instance, declining global bond yields and lower interest rates could increase the appeal of emerging market assets. Karthik Kumar of Axis Mutual Fund highlighted that a fall in global yields and stable currency movements could make Indian markets more attractive to foreign investors. He stated, "As long as the global yields kind of continue to come off and if the interest rate expectations are one that sees cuts across the space and currency continues to improve, then it is only natural that emerging market space as a whole will attract flows and we should be natural beneficiaries of that." This suggests that future interest rate cuts and stable currency environments could reverse the current trend of FII outflows.

Moreover, sector-specific opportunities in emerging markets could also influence FII flows. For example, a weaker dollar could serve as a tailwind for Indian metal stocks, while strong demand in the real estate sector could attract FIIs. Andrew Holland of Avendus Capital noted that a weaker dollar could benefit Indian metal stocks, and Parvez Akhtar Qazi of Nuvama Group sounded a bullish note on real estate, citing strong demand in the sector for the next three years. However, Qazi also warned that most real estate stocks have moved beyond valuation comfort, which could temper FII enthusiasm. This indicates that sector-specific opportunities and valuations will play a role in future FII investment decisions.

Conclusion

In summary, global macroeconomic trends, including interest rate movements and geopolitical uncertainties, significantly impact FII flows into emerging markets like India and China. Future interest rate cuts, stable currency environments, and sector-specific opportunities could influence FII decisions, potentially reversing the current trend of outflows. However, high valuations and geopolitical uncertainties will continue to create an environment of caution, shaping the flow of capital into these markets.

The shifting sands of global investment are revealing a stark contrast between two of the world's most populous nations: India and China. As foreign institutional investors (FIIs) increasingly turn their backs on India, they are drawn to China with an almost magnetic pull. This phenomenon is not merely a fleeting trend but a reflection of deeper economic and geopolitical currents that are reshaping the global financial landscape. The world must choose: cooperation or collapse.