India looks less expensive. Is it enough to bring FIIs back?

India’s valuation premium has declined sharply from its 2024 peak, even as competing emerging markets stage a sharp comeback. The question now for foreign investors: Is India starting to look fairly valued again?

MSCI India’s premium over the broader MSCI Emerging Markets (EM) index steadily rose from 116% in 2022 to 164% in 2024, when Indian equities were riding a strong bull run.

As markets shifted into a consolidation phase in 2025, the valuation gap also narrowed sharply to 119%, and has fallen to 93% so far in 2026 (as of 29 January).

The valuation gap

While the valuation premium has reduced, MSCI India’s returns have cooled. Meanwhile, those of MSCI China, MSCI Korea and MSCI Taiwan have steadily improved since 2022.

MSCI India has fallen 2.6% so far in 2026, marking a weak showing and a clear loss of regional leadership. In contrast, Asian markets have rebounded sharply — MSCI Korea has surged 27.6%, MSCI Taiwan has jumped 13.1%, and MSCI China has risen 7.6% — highlighting a decisive shift in investor preference away from India.

“India’s equity market returns have lagged emerging market peers over the past two years due to a mix of factors,” said Vinay Jaising, CIO and head of equity advisory at ASK Private Wealth. The rupee has depreciated nearly 5% over the past year and 8–9% over the last two years, leading FIIs to pare positions by about $20 billion in CY2025 and another $4 billion in the first month of this year, he added.

In addition, a large amount of money already invested in listed stocks was redirected into buying new IPOs, adding pressure on equities.

He also pointed to fundamental issues such as a banking liquidity crunch and a slowdown in consumption, which led to earnings cuts across corporate India and further aggravated the underperformance of Indian equities last year.

Jaising said India’s market cap-to-GDP ratio currently stands at 130%, which is higher than other emerging economies such as China (75%), Indonesia (58%), and Brazil (48%). Besdies, India’s earnings growth was 3-4% in FY26 so far, as against EM, which was 20-22%.

However, “the good news is that most of the fundamental reasons are behind us,” he said.

Jaising is of the view that India’s economic growth is far higher than that of the other EMs. Also, its weightage in EM indices is higher than most economies, but for China and since the growth in India earnings would be back, “we think India stands a strong chance to get its allocated based weightage in indices as investments, if not higher”.

Jay Kothari, senior vice president, global head–international business and lead investment strategist at DSP Asset Managers, said a key factor behind India’s relative underperformance: its perception as an ‘anti-AI trade’, given the lack of listed AI-related stocks. This has also driven capital reallocation towards markets such as Korea, China, Taiwan and the US, he added.

“We believe that many of these negatives are factored in, and if we continue to see earnings recovery and policy support, along with reducing foreign selling, India could be bottoming out, and one could look at adding from a long-term investment perspective.”

Market participants feel that improving earnings, policy support on both the fiscal and monetary fronts, and a stabilising rupee could offer the much-needed support to Indian equities.

That said, Kotak Institutional Equities struck a cautious tone in its 27 January report. “We wonder if the recent correction in and continued large underperformance of the Indian market versus other markets simply reflects (1) a ‘temporary’ blip in the market or (2) the start of a ‘permanent’ reset in multiples to their ‘correct’ levels.”

The brokerage warned that rising disruption risks across sectors and limited investment by Indian companies to counter them could eventually drive a structural de-rating of multiples to more realistic levels. “The de-rating has been delayed by the price-agnostic purchases of retail investors,” the report said.