India’s stock market has seen a correction over the past year, and despite that, foreign investors continue to stay cautious. According to Ridham Desai, Chief Equity Strategist for India at Morgan Stanley, global investors are underweight on India due to three main reasons — high valuations, lack of AI-driven opportunities, and strong domestic investor competition.
1. High Valuations Still a Concern
Desai pointed out that even after recent corrections, Indian equities remain expensive compared to other emerging markets.
“Foreign investors still find India’s absolute valuations high, even though relative valuations have improved,” he said in an interview with NDTV Profit.
He explained that a year ago, China’s markets were trading at 9 times earnings, while India’s were at 20 times. Now, China trades around 15 times, while India is still near 20 times — showing little change despite flat market performance.
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Currently, the Nifty 50 index trades around 22.23 times its price-to-earnings ratio, while China’s multiple stands near 17.63. This makes Indian stocks look costlier in comparison, even as they’ve corrected nearly 5% from record highs set in September 2024.
2. No Major AI-Driven Trade in India
Another major factor, according to Desai, is the absence of an artificial intelligence (AI) trade in the Indian market — a trend that’s been fueling rallies across global indices.
“India has no AI trade. In the past six months, the world has been all about AI,” Desai said.
Markets in the U.S. and other regions with AI-focused companies have seen strong gains of 20–40%, thanks to the growing excitement around artificial intelligence, semiconductors, and defense technology. India, however, lacks significant listed companies directly benefiting from the AI boom — which makes it less appealing to foreign institutional investors (FIIs) looking for thematic growth stories.
3. Strong Domestic Investor Base Limits FII Opportunities
Desai also highlighted that India’s strong domestic investor base plays a role in keeping foreign inflows subdued.
“Foreign investors are up against a strong domestic bid,” he explained. “Domestic investors absorb most of the selling pressure and buy every dip.”
This means that even if FIIs want to invest, they need to push share prices much higher to compete with Indian retail and institutional buyers who continue to invest consistently through mutual funds and SIPs.
Indian Markets Still Offer Long-Term Potential
Despite these short-term challenges, Desai maintains that India remains attractive in relative terms compared to other emerging markets. He noted that over the last 25 years, India has consistently been one of the most appealing destinations for long-term investors.
However, earnings growth has not matched the rise in share prices, leading to stretched valuations — something global investors are waiting to see correct before committing fresh capital.
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