Moderating EM flows, few AI opportunities, monetary tightening behind FPI sell-off: Neelkanth Mishra

Neelkanth Mishra, Chief Economist, Axis Bank

• FPI sell-off due to weak EM flows, sector shifts, and India's fiscal tightening.
• Global EM funds wary due to risk aversion, weak India sector opportunities
• Fiscal and monetary tightening in India easing, may support market earnings

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There are three key reasons behind the recent foreign portfolio investor (FPI) sell-off, according to Neelkanth Mishra, Chief Economist, Axis Bank.

First, a large share of India’s foreign ownership comes through emerging market (EM) and Asia-focused funds. These funds have seen weak inflows overall. Heightened global risk aversion—driven by stress in countries such as Indonesia, Turkey, Argentina and South Africa, and concerns that China could eventually face restrictions similar to Russia—has made EM funds more cautious. As a result, EM allocations as a whole have been under pressure.

Second, within EM portfolios, India is currently less compelling on a sectoral basis. Mishra noted that global allocation decisions are now driven more by sectors than by countries. The strongest global themes—semiconductors, memory chips and artificial intelligence—do not have direct or large-scale plays in India. While India may offer 14% earnings growth over the next 12 months, investors compare that with markets such as Korea, where equities can rise nearly 20% in a single month. As a result, EM investors are gravitating towards markets where earnings upgrades appear faster and more immediate, even if those opportunities are temporary.

The third factor, he said, was self-inflicted. India underwent simultaneous fiscal and monetary tightening in FY25, the effects of which spilled into the current fiscal year and led to earnings downgrades. That pressure is now beginning to ease.

Fiscal tightening is largely complete, with the fiscal deficit no longer needing sharp reductions, while monetary policy has started to ease, even though liquidity transmission remains a work in progress. Importantly, Mishra said this should limit further earnings downgrades, making this factor increasingly supportive for markets.

Summing up, Mishra said the third factor is clearly being addressed, the second may prove temporary, while the first—weak EM flows amid global uncertainty—is more structural and will take longer to reverse.

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