"why would you pay 20 plus PE for a 8% growth if the rupee depreciates then foreigners lose even more money net FI flows closer zero" - R Sivakumar [00:00:00]
"that's the slowest in 23 years you need to go back to fiscal 2003 to see slower growth than that which means even the global financial crisis any of those years did better than FI26" - R Sivakumar [00:00:28]
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"so we should expect yields to remain higher for longer but inherently higher interest rates is not bad news if the world solves its bond problem that cannot be bad news for us right" - R Sivakumar [00:00:42]
"growth is looking tepid and second valuations were quite rich today yes growth has come off but we are still doing okay but valuations have now become neutral and I think this is going to be a biggest change going forward" - R Sivakumar [00:00:51]
"what really stood out to me is that on the last 10year basis now net FI flows close to zero so we've actually seen some extraordinary amount of outflows in the last just in the last two years" - R Sivakumar [00:04:43]
"we've lost out on growth we've lost out on AI in fact India is seen as that classic sort of AI loser so all of this has really contributed in a big way" - R Sivakumar [00:05:35]
"at the end of the day FIS don't have any they are not motivated by any philosophy they are motivated by where the returns are and so they will put their money where they see the best returns coming" - Samir [00:56:26]
Speakers & Credentials
Samir – Host of Open Dialogue by Axis Bank, leading discussions on macroeconomics, corporate finance, capital markets, and national economic policy for the milestone 50th episode [00:01:32].
R. Sivakumar (Siva) – Senior financial leader, portfolio strategist, and macro analyst, providing expert commentary on foreign institutional investor behavior, market cycles, bond yields, and valuation models [00:02:16].
1. Executive Summary
Foreign Institutional Investors (FIIs) have undergone a major structural shift in the Indian equity landscape, withdrawing $20B+ over 2025–2026, bringing 10-year net cumulative FII inflows down to near zero [00:04:33, 00:04:43].
While Indian stock ownership remains anchored by corporate promoters (30%–50%) and government entities (~10%), market flow leadership has shifted from FIIs to Domestic Institutional Investors (DIIs) and retail participation [00:02:50, 00:03:19].
Slower macroeconomic and corporate momentum—highlighted by FY26 nominal GDP growth dropping below 9% and net GST collections growing at just 7% YoY (the slowest rate in 23 years since FY03)—hampered growth expectations [00:06:50, 00:07:02, 00:00:28].
Rich initial valuations (PE ratios > 20) combined with currency depreciation risks made the risk-reward equation unattractive for global macro funds during a period of rising global bond yields [00:00:00, 00:00:51].
Global capital re-allocation was further influenced by perception gaps, such as India being viewed as an "AI loser" relative to global tech-heavy markets, alongside geopolitical friction in West Asia [00:05:35, 00:55:45].
Large-cap valuations have now corrected into neutral/comfortable territory, laying the groundwork for potential trend reversals if corporate earnings growth sustains momentum over upcoming quarters [00:00:57, 00:56:09].
Small-cap and mid-cap sectors continue to trade at elevated multiples, presenting downside risks that require disciplined portfolio risk management [00:54:23, 00:56:56].
Indian Equity Market Ownership & Structural Power Shifts
Promoters and promoter families anchor ownership across Indian listed equities, maintaining between 30% and 50% on average, with certain individual companies seeing promoter stakes reach 50% to 75% [00:02:42, 00:02:50].
The Indian Government holds approximately 10% of total stock market capitalisation in aggregate, primarily driven by large public sector undertakings (PSUs) [00:02:56].
Market float outside of internal insiders is split across Foreign Institutional Investors (FIIs), Domestic Institutional Investors (DIIs), and retail investors [00:03:06].
While FIIs held price-setting power over the preceding 30 years, DIIs have taken over domestic market leadership over the last 2–3 years, providing counter-cyclical stability [00:03:13, 00:03:24].
The FII Flow Reversal: From Post-COVID Boom to Net-Zero Decade
Post-COVID economic recovery (spanning 2020 through September 2024) saw massive global capital inflows into Indian equities driven by strong fiscal consolidation and policy confidence [00:04:00, 00:05:16].
Turnaround began late in CY24 as strong inflows in Q1–Q3 were completely offset by heavy selling in Q4, yielding a net balanced outcome for the full calendar year [00:04:15, 00:04:28].
Over the 2025–2026 timeframe, capital outflows accelerated significantly, exceeding $20 billion [00:04:33].
On a rolling 10-year horizon, net FII flows into India have converged close to zero, meaning the entirety of cumulative capital imported across the prior 8 years was extracted over a 24-month window [00:04:43, 00:06:16].
Growth Disappointments, Fiscal Signals, and AI Trade Realignment
Growth metrics decelerated significantly in FY26, with nominal GDP slowing below 9% [00:06:50].
Net GST collections—which act as a proxy for corporate gross value add (output minus input costs)—grew at just 7% YoY, marking the slowest underlying pace since FY2003 (23 years prior) and underperforming periods like the 2008 Global Financial Crisis [00:07:02, 00:00:28, 00:00:36].
Foreign asset allocators questioned valuation premiums (20+ PE ratios) paired against mid-single to low-double digit growth (8–9%), especially when compounded by rupee depreciation risks [00:00:00].
Global capital allocators reallocated funds toward global generative AI ecosystems, where India was broader-market perceived as an "AI loser" lacking direct hardware or frontier model plays [00:05:35].
Valuation Neutrality, Small-Cap Risk, and the Road Ahead
Multi-quarter price corrections and steady underlying fundamental absorption have brought large-cap valuations down from rich levels to neutral/comfortable historical averages [00:00:57, 00:56:09].
Small-cap and mid-cap segments retain rich valuation premiums, creating potential downside risks should broader earnings growth face further headwinds [00:54:23].
External macro risks, including West Asia geopolitical tensions and high global bond yields ("higher for longer"), continue to impact asset pricing models [00:00:42, 00:55:45].
Early indicators point to economic activity stabilizing over recent quarters; if 2–3 quarters of earnings acceleration materialize, FII capital flows are positioned to reverse direction [00:01:02, 00:56:02].
The Reference Vault
4. Data & Figures
Data Point
Value
Context
Timestamp
Promoter Stock Ownership Range
30% – 50% (up to 75%)
Average equity percentage owned by promoters in listed Indian companies
The Net GST / Corporate Value-Add Proxy Model [00:07:09]
Application: Traditional gross domestic product metrics can suffer from lagging reporting and revisions. Sivakumar utilizes Net GST collection growth as an immediate high-frequency proxy for underlying corporate value add. Because GST fundamentally measures output tax minus input tax credit, it functions as a direct real-time reflection of aggregate corporate gross margins and economic activity. When Net GST decelerated to 7% YoY in FY26, it signaled weakening corporate profitability and margin compression well before standard equity earnings reports caught up.
Application: Global institutional capital allocates across international markets based on a clear risk-adjusted equation: Nominal Growth vs. Valuation Multiples vs. Currency Depreciation. When an emerging market demands a 20+ P/E valuation multiple while nominal earnings growth slows to 8%, foreign investors face a compressed real yield. Adding foreign exchange depreciation risks means dollar-denominated returns can quickly turn negative, driving swift foreign capital reallocation to higher-yielding fixed income or lower-valuation tech hubs.
Application: Historically, FIIs served as the primary price-setting marginal buyer in Indian equities, causing market drawdowns whenever foreign capital exited. Over the 2024–2026 cycle, structural domestic inflows via Mutual Fund SIPs and domestic institutional investors (DIIs) insulated the domestic equity market. DIIs effectively absorbed over $20 billion in FII outflows, establishing a domestic liquidity floor and fundamentally changing market ownership dynamics.
The "AI Loser" Global Sector Re-allocation Arbitrage [00:05:35]
Application: In global macro asset allocation, capital rotates away from markets perceived to be structurally disrupted by technological cycles. During the global generative AI investment boom, global capital sought concentrated exposure in semiconductor supply chains and hyperscale cloud infrastructure. India's heavy market index weighting in traditional IT services led global allocators to view the country as vulnerable to AI-driven disruption, accelerating capital rotation toward tech-focused global markets.
Context: Sivakumar highlighted this striking statistic to demonstrate how rapidly narrative shifts convert into flow realities. Market participants often focus on short-term quarterly flows, missing broader trend shifts. Pointing out that 10-year net FII inflows had hit zero illustrated that a two-year capital pull-out wiped out eight years of sustained foreign capital accumulation.
The FY2003 Historical Baseline Comparison [00:00:28]
Context: To put the FY26 growth slowdown into proper historical perspective, Sivakumar benchmarked the 7% net GST growth against past crisis periods. Even during major global economic disruptions like the 2008 Global Financial Crisis, underlying revenue indicators remained higher than FY26, demonstrating that investors had to look back 23 years (to FY2003) to find a comparable growth environment.
7. References & Recommendations
Companies & Financial Institutions
Axis Bank / Open Dialogue – Host institution and media platform celebrating its 50th episode milestone [00:01:32].
Foreign Institutional Investors (FIIs) – Global investment entities whose capital flows drive international equity markets [00:02:16].
Domestic Institutional Investors (DIIs) – Indian domestic mutual funds, insurance companies, and pension funds [00:03:13].
Historical Events & Macro Periods
Global Financial Crisis (GFC - 2008) – Historical economic crisis referenced as a baseline for comparing growth and revenue trends [00:00:36].
Fiscal Year 2003 (FY03) – Macro economic reference point representing the previous historical low in underlying economic expansion [00:00:28].
Post-COVID Economic Expansion (2020–2024) – Period of strong fiscal reform and heavy global equity inflows into India [00:04:00].
Geopolitical Regions & Macro Factors
West Asia Region – Mentioned regarding geopolitical conflict risks affecting global supply chains and commodity pricing [00:55:45].
Global Bond Markets – Referenced regarding high long-term yields ("higher for longer") impacting sovereign debt and risk asset pricing [00:00:42].
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FY26 Nominal GDP Growth
< 9%
Slowdown in nominal GDP expansion during fiscal year 2026