India large caps face foreign outflows as Bernstein flags weak reinvention

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India large caps face outflows

Highlights

Foreign investors sold $1.7 billion in Indian equities in September, bringing 2023 outflows to nearly $26 billion, the highest on record.
Nifty 50 index dropped over 10% year-to-date, underperforming despite India’s robust economy, as large caps lagged and mid-caps posted 31% earnings growth in the June quarter.
Bernstein notes major corporates like Reliance Industries and HDFC Bank face pressures, with sector-specific risks from AI adoption and boardroom disputes hindering capital commitments to emerging industries.

Bernstein report links outflows to large-cap weakness

As reported by CNBC, citing Bernstein, foreign investors have little reason to increase exposure to India because many of the country’s large corporates are still tied to older business models and are not delivering the growth needed to justify elevated market valuations.

The brokerage said many large-cap companies represent a bygone economic era and are focusing more on consolidating existing positions than investing for the future. It added that some of the country’s biggest businesses are relying on policy protection from global competition rather than committing capital to emerging industries such as electric vehicles and semiconductors.

After a pause in July and August, foreign investors have resumed selling Indian equities in September. Data from depository firm NSDL shows direct sales of Indian equities have reached $1.7 billion this month, bringing total outflows this year to nearly $26 billion, the highest ever.

Gap widens between economic growth and market leadership

India’s large-cap index, the Nifty 50, is down more than 10% since January, leaving it among the world’s weaker-performing markets even as the broader economy continues to rank as the fastest-growing major economy.

Recent market data suggests much of India’s growth is being captured outside the benchmark index. Experts earlier told CNBC that companies in manufacturing, fintech and consumer technology are more heavily represented in mid-cap and small-cap segments, and Ambit Capital data showed average earnings growth for Nifty 50 companies was 11% in the June quarter, compared with 31% for mid-caps from a year earlier.

Bernstein said smaller companies still offer promise but remain difficult for large institutional investors to back at scale because of low free floats, limited liquidity and sparse coverage. It also pointed to pressure on major names including Reliance Industries and HDFC Bank, while information technology companies in the Nifty 50 face revenue and margin strain amid global AI adoption.

The brokerage added that Tata Group’s boardroom dispute could affect its ability to invest in India’s first semiconductor fabrication plant. With no clear local champions in artificial intelligence and the IT services sector exposed to AI disruption, Bernstein said India is widely viewed as an anti-AI trade and is unlikely to see a major reversal in foreign capital flows even if the global AI trade weakens.

In our earlier article on the World Economic Forum’s September 2026 Chief Economists Outlook, we noted that India still had the strongest growth expectations among major regions, backed by resilient domestic demand and a 7.8% GDP expansion in the first quarter of FY27. The piece also highlighted the disconnect between this upbeat macro outlook and equity performance, with the Nifty 50 down about 10% for the year and fewer economists ranking India as a preferred business destination.

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