India flags capital outflows as key 2027 market risk

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India 2027 capital outflow risk

Highlights

India's benchmark indexes have declined nearly 12% since January due to excess liquidity and record foreign portfolio investor outflows exceeding $33 billion year-to-date.
Regional capital rotation toward AI-focused markets has reduced India's MSCI Asia Pacific ex-Japan index weighting from 19% to 10%, while Taiwan and Korea now lead with 29% and 22% respectively.
Indian IPOs raised $60.4 billion between 2021 and 2025, with $37.7 billion—63% of proceeds—going to existing shareholders selling shares, supporting investor exits at premiums.

Liquidity and outflow pressures on equities

As reported by CNBC, Sitharaman says excess liquidity in India's equity market is contributing to underperformance because investors can leave equities more easily when conditions shift. Speaking in an exclusive interview on the sidelines of the IMF-World Bank meetings in Bangkok on Friday, she says the fundamentals of the Indian economy are "fine" even as market sentiment remains under pressure.

Since January, India's benchmark indexes have fallen nearly 12%, according to LSEG data, despite economic resilience through trade uncertainty and geopolitical shocks. Sitharaman says record foreign investor withdrawals from Indian equities have made continued capital outflows one of the biggest risks facing the country in 2027.

Foreign portfolio investors have sold more than $33 billion of Indian equities so far this year, according to NSDL. At the same time, domestic capital continues to support the market, with Indian equity mutual funds recording net inflows every month since March 2021, based on data released earlier this month by the Association of Mutual Funds in India.

AI-driven capital shifts reshape regional flows

India is also contending with a broader regional rotation of investment toward artificial intelligence-linked markets and the U.S. Sitharaman says the movement of capital toward AI and the U.S., instead of into a wider mix of country and sector opportunities, is a concern for India.

That shift has favored markets such as Taiwan and Korea, which host major AI companies. A Goldman Sachs report dated Oct. 8 says Taiwan now holds the largest weighting in the MSCI Asia Pacific ex-Japan index at 29%, while Korea has risen to second place at 22%; India's share has fallen from 19% a few years ago to 10%.

Even so, Sitharaman says India would not be "hurt" by spillover if the global AI rally weakens because the country has not attracted the same wave of AI-related investment as other jurisdictions. She adds that India is no longer a laggard in frontier technology and is investing in semiconductor manufacturing, while multinational companies, private equity funds and foreign investors have still been able to exit investments at a premium in recent years.

Between 2021 and 2025, Indian initial public offerings raised $60.4 billion in total, according to an EY report published in August. Of that amount, $37.7 billion, or 63% of proceeds, went to existing shareholders selling stock to the public.

In our earlier article on the RBI’s rupee-defense operations, we explained that the central bank had drawn down a large share of the FX liquidity it raised via special measures—using spot intervention and swaps to counter pressure on the currency and absorb surplus rupee liquidity. We also noted that high oil prices, rising U.S. yields and persistent foreign equity outflows were key drivers of the strain, raising questions about how long the RBI can keep cushioning markets if outflows continue.

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