Investor positioning has yet to catch up with the earnings recovery, and the gap is clearest in the flow and ownership data. Over the past two years, India slipped from a long-standing overweight for emerging market (EM) and Asia ex-Japan funds to an underweight, held back by high valuations and, until recently, weak earnings. As a result, most major global funds still hold less exposure to Indian equities than their benchmarks imply — and closing that gap could translate into potential net inflows of around $115 billion.
That shift is now tentatively beginning. Foreign investors have turned net buyers for a second consecutive month, with inflows of around $3 billion in August, drawn by India’s improving earnings, a stabilizing currency and a rotation of global capital toward the non-AI cohort. Most of that buying has gone into consumer services, including e-commerce and hotels, along with metals, mining and healthcare.
But this return is not yet broad-based. Foreign ownership in large caps has fallen from a peak of around 24% in December 2020 to 17.6% in mid-2026, the lowest in over a decade, while mid- and small-cap holdings have held steady. Large caps, where the earnings recovery is now most visible, have yet to see foreign positioning turn — a gap that could close as the profit cycle broadens.
“India’s growth story looks most attractive on a sector-specific or thematic basis. On valuation versus growth alone, in relative terms it takes a backseat — which is why foreign investors are finding their exposure through the mid- and small-cap space,” said Batra.
