Bank of America has issued one of the most direct assessments yet of India’s foreign investor problem — global funds are unlikely to return before 2027, with 2026 “definitely” not looking like a comeback year for inflows, as the artificial intelligence-driven earnings upgrade cycle in South Korea and Taiwan continues to pull capital away from Indian equities.
The warning comes as India’s stock markets rank among the worst-performing globally in 2026, with a record $23 billion in foreign selling through the year compounded by a rupee that has weakened to record lows — meaning dollar-denominated losses for foreign investors are even larger than the index declines suggest.
The earnings problem
BofA’s case against a near-term FII return rests on a fundamental earnings arithmetic problem. The brokerage retained its forecast of approximately 8.5% earnings growth for Nifty 50 companies in FY27 — and estimates FY26 growth at around 7%. As BofA strategist Shah put it: “So essentially, we are looking at low growth on a low base for India.”
The contrast with AI-driven Asian markets is stark. South Korea and Taiwan are delivering high earnings growth on the back of semiconductor and technology hardware demand from the global AI buildout — Nvidia’s supply chain, data centre equipment manufacturers, and memory chip producers are concentrated in these markets. Global investors chasing earnings upgrades are naturally gravitating toward markets where the upgrade cycle is steepest, and India — with its domestic consumption-driven economy — does not participate in the AI hardware supply chain in any meaningful way.
The valuation gap that keeps foreign money away
Even after a 9% decline in the Nifty 50 in 2026, Indian equities remain expensive by global standards. The Nifty trades at approximately 18 times one-year forward earnings — a premium that made sense when India was delivering 15-18% earnings growth and attracting structural allocation from global emerging market funds. At 7-8.5% earnings growth, the 18x multiple is harder to justify against alternatives.
The comparison BofA draws is damning for Indian bulls. South Korea’s benchmark — the world’s best-performing stock market in 2026 — trades at approximately 7.5 times forward earnings while delivering high earnings growth. An investor choosing between India at 18x with 8.5% growth and Korea at 7.5x with high double-digit growth faces a straightforward allocation decision — one that explains the $23 billion outflow from Indian equities without requiring any India-specific negative thesis.
Why the selling could extend to 2028
BofA’s scenario of continued foreign selling into 2027 or even 2028 is not a prediction of a market crash — it is a structural reallocation story. The AI earnings upgrade cycle in Northeast Asia is still early. South Korean semiconductor companies, Taiwanese chip manufacturers, and the broader technology supply chain feeding the global AI infrastructure buildout have multiple years of elevated earnings growth ahead of them. As long as that cycle continues and India’s earnings remain in the 7-9% range, the relative allocation case for India does not improve materially.
The rupee adds a compounding negative. Foreign investors in Indian equities are holding rupee-denominated assets. A rupee that has fallen from approximately 84 to nearly 97 against the dollar in the current crisis imposes currency losses on top of equity market losses — creating a double penalty that makes India even less attractive on a dollar-adjusted return basis relative to markets where currencies have been more stable or have appreciated.
What could reverse the trend
The $23 billion outflow and BofA’s 2027-or-later return timeline are not immutable. Several conditions could accelerate a foreign return. A resolution of the Iran war that brings oil prices down materially would stabilise the rupee, reduce inflationary pressure, improve the current account, and make India’s growth trajectory look significantly better. An earnings acceleration — driven by a domestic consumption recovery, government capex pickup, or an export-linked sector boom — would compress the forward PE without requiring a price decline. A Fed rate cut cycle that weakens the dollar and improves the relative attractiveness of all emerging market assets including India would also shift the equation.
None of these are near-term certainties. BofA’s assessment — that without a meaningful expansion in earnings growth, India’s premium valuations will remain under pressure — is the accurate framing of where the market stands today.
This article is for informational purposes only and does not constitute investment advice. Please consult a qualified financial advisor before making any investment decisions.