After months of persistent foreign outflows from Indian equities in 2025, global investment firm GMO has flagged a recent but possibly fleeting return of foreign interest in the market. In its June note, GMO’s Systematic Global Macro (SGM) Strategy revealed that despite a pickup in flows since April, India remains one of the bigger shorts in its equity portfolio.
The shift in flows, which began around March 20 and gained traction in April, coincided with geopolitical calm and some upbeat macro signals. But GMO remains wary. “We’ll need to see substantial improvement in valuations and local sentiment before making Indian equities a ‘buy,’” the firm said, doubling down on its bearish stance.
Foreign flows are significant because they have a strong correlation with daily returns. Historically, days with positive foreign flows show significantly better market returns than days with negative flows, GMO noted. Yet, the firm argues, current inflows are not rooted in market fundamentals.
According to GMO, Indian equities today are trading at forward P/E ratios above the historical median, signalling expensive valuations. Simultaneously, 12-month price momentum is weak, undermining investor sentiment. This combination typically repels foreign investors, not attracts them.
Historical analysis of flows shows that foreigners have invested most heavily in Indian equities when they were both cheap and showing strong momentum. That’s not the case now. “Today’s flows appear to be an exception… most likely driven by short-term relief of risk and tariff speculation,” the report mentioned.
Why the sentiment shift?
The brief foreign optimism appears to have been triggered by the Trump administration’s mid-April decision to delay tariffs, leading to a sharp drop in market volatility. The VIX, which spiked to 52 in April, has since cooled. Better-than-expected CPI readings for February and March in the U.S. may have further buoyed sentiment, GMO suggested.
But the rally could be fragile. If geopolitical tensions or trade risks reignite, flows may just as easily reverse.
India vs emerging markets
Even among emerging markets, India is starting to look stretched. GMO’s valuation models forecast long-term underperformance for India relative to broader EM indices, citing high valuation multiples and stressed corporate margins. Sentiment models, too, are flashing red due to uncertainty over future corporate profitability.
This misalignment has prompted GMO to keep India as a significant short in its Systematic Global Macro portfolio, a contrarian position given the recent foreign inflows.
India's markets have been among the global outperformers over the past two years, buoyed by resilient domestic liquidity, strong retail participation, and a booming IPO pipeline. However, foreign flows have remained a weak link, often dictated by global risk appetite more than local fundamentals.
As India gears up for a slew of key economic data in July and the RBI’s policy stance in August, sustained foreign interest could lend critical support.
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