Foreign Capital Exited Record-high Indian Stock Market, Accelerating Shift to South Korea and Taiwan

The Indian stock market is experiencing the most severe foreign capital exodus since the opening of the capital market more than thirty years ago.

So far this year, foreign portfolio investors have withdrawn a net amount of about 2.06 trillion rupees (approximately $21 billion) from the Indian stock market, with a net selling of 2 trillion rupees in just the past two months. According to data from the brokerage firm JM Financial, the share of holdings by foreign investors in the Indian stock market has dropped to 14.7%, hitting a 14-year low. The benchmark index Nifty 50 has fallen by 9.7% year-to-date.

The selling may be nearing the end, but capital inflow is still early

Goldman Sachs released a report last week indicating that large-scale selling may be nearing its end, with the downside risk of additional selling pressure from foreign capital being about $4 to $5 billion. However, the report also warns that this does not mean that capital will flow back soon.

Earlier this year, after the ceasefire agreement was reached between the United States and Iran in early April, international oil prices corrected, but foreign capital did not use the opportunity to reposition in the Indian market - Goldman Sachs makes the judgment that hoping for the easing of Middle Eastern tensions to trigger a capital inflow is a misjudgment.

The AI wave reshapes the capital pattern of emerging markets, with India's absence

The underlying reason for the withdrawal of foreign capital lies in the acceleration of global funds towards AI-benefiting markets.

The current incremental allocation flowing into emerging markets is mainly directed towards South Korea and Taiwan, where local semiconductor leaders continue to attract international capital with their key positions in the AI industry chain.

The Indian stock market currently lacks large-scale AI concept targets with market influence, and this structural shortcoming is particularly prominent in the current technology-themed market trend, directly suppressing the motivation for foreign capital to return to India.

Domestic funds support the bottom, but cannot drive a rebound

As foreign capital retreats, domestic mutual funds have become the most important stabilizing force in the market, with their holdings reaching a historical high.

More and more retail investors choose to hold indirectly through systematic investment plans (SIP), relying on the logic of "long-term average cost smoothing" to persist in the market. However, this kind of passive capital support is difficult to transform into an upward driving force. It is worth noting that the scale of retail investors holding Indian stocks directly has declined by 9.2% since March 2025, and retail investor confidence has also shown signs of weakening.

At present, the situation in the Indian stock market is that the downside may be limited, but the upward space is also obviously suppressed. The systematic investment plan provides a "positioning on defense," rather than a catalyst for igniting the market. The true recovery of the Indian stock market still needs to wait for the substantial repair of foreign capital confidence.