Why Foreign Investors Turned Cold on India, per Morgan Stanley

Foreign investors are cold on India, and Morgan Stanley’s most-watched India strategist says they have the reason backwards. Ridham Desai, the bank’s Head of India Research and Chief India Equity Strategist, told CNBC-TV18 at the Morgan Stanley Investor Forum 2026 that the missing artificial intelligence trade is a cover story. The real drag is slower earnings growth: India’s profits are expanding at roughly 12 to 14 percent, while Korea, Taiwan, Japan and the United States run far hotter.

There is a second mechanism underneath the flows, and Desai named it too. As India underperforms, its weight in global stock indexes drops, which forces index-tracking funds to keep selling shares just to match the smaller weight.

The Growth Gap Behind the Cold Shoulder

Desai’s framing is blunt, and he did not dress it up for the audience.

AI is an excuse. The real deal is on growth.

His point is that India still looks reasonable on valuations but has lost the one thing global money chases hardest right now, faster profit growth than the next market over. India’s relative derating started around September 2024, when its growth and valuations peaked together. Since then earnings have decelerated at home while the AI-linked markets have pulled away. Brokerage Jefferies estimates Korea and Taiwan together account for nearly 83 percent of projected 2026 earnings growth across Asia Pacific outside Japan, with Korean profit revisions jumping about 95 percent on memory demand. India, by contrast, has been flagged as the major market with the sharpest negative earnings revisions over a recent three-month window, even as the Nifty 50 trades near 21 times earnings. Desai still rates India attractive on a longer horizon, a position the bank lays out in Morgan Stanley’s longer-run case for Indian equities. The near-term scoreboard is simply unkind.

Where the Money Went This Year

The selling has been heavy and fast. Foreign investors pulled roughly $21 billion from Indian equities over two months this spring, putting 2026 on course for the worst year for foreign outflows since the market opened to overseas money in 1993. Much of that cash did not sit idle. It moved straight into Seoul and Taipei, where stocks have run on AI chip demand.

A foreign portfolio investor (FPI, an overseas fund buying listed shares) had a clear pattern through one April window: more than $5 billion sold in India, about $4 billion sent to Korea and over $5.5 billion to Taiwan. March set a domestic record for the exit.

• ₹1,17,775 crore in net FPI equity selling in March 2026, beating the previous monthly record of ₹94,017 crore from October 2024.
• Net sellers on every single trading day of that month.
• An 11 percent drop in the Nifty 50 over the same stretch.

That is the visible half of the story, the headline number that wire services led with. Desai spent more of the interview on the half that explains why the bleeding has been so mechanical.

How Falling Index Weight Feeds Itself

The strategist pointed to a technical force behind the outflows, and it is the part most readers miss. A large share of the selling is passive, meaning it comes from funds that simply mirror an index rather than judge a stock. When India underperforms, its slice of the benchmark shrinks, and those funds sell shares to stay aligned with the smaller weight. The selling is not a verdict on any company. It is portfolio plumbing.

The Mechanics of a Weight Cut

India’s share of the MSCI Emerging Markets benchmark that global passive funds track has slid hard since early last year, from around 19 percent toward roughly 12 percent by some estimates, while Korea and Taiwan climbed in the other direction. MSCI is the index provider whose weights steer trillions in passive money. Because India’s most liquid stocks are its large private banks, those names become the default thing to dump when a global fund has to cut exposure, which is why financials have carried so much of the selling regardless of how the lenders are actually performing.

The 2024 Move in Reverse

Desai’s sharper observation is that this loop ran the other way not long ago. In 2024, when India was outperforming, rising index weight pulled passive cash in and helped stretch valuations to that September peak. The same machine now works in reverse. Active foreign managers have sold too, he said, but passive money has grown into a larger global force, and it does not respond to cheap valuations or improving growth the way an active investor might. It just tracks the weight, down as readily as up.

Retail Money Has Been the Buyer

Someone has stood on the other side of every foreign sell order, and lately it has been Indian households. Domestic mutual fund (MF) buying of roughly ₹1.05 lakh crore in March nearly matched the record FPI selling that month, and the inflows did not flinch when the index fell. Two engines drove it: scheduled monthly contributions that arrive no matter the headlines, and lump-sum buying that picked up as prices dropped.

• Systematic investment plan (SIP, an automated monthly mutual fund contribution) inflows hit a record ₹32,087 crore (about $3.8 billion) in March, up from ₹29,845 crore in February.
• Equity schemes booked net inflows of ₹40,450 crore that month, the 61st straight month of positive equity flows since March 2021, per the industry body’s monthly mutual fund data.
• Even after a slight April cooldown, SIP money still ran above ₹31,000 crore.

Desai does not expect this bid to fade, because Indian families are structurally shifting more savings into equities. That cushion has a side effect he flagged: with so little new stock being issued, domestic cash has soaked up most of the available float, leaving foreign buyers less room to re-enter even if they wanted to. Strong retail support is holding the market up and quietly tightening the door behind it.

What Could Turn Foreign Flows

For overseas money to come back in size, Desai said one thing has to change: relative growth expectations. That happens through one of two routes. India’s own growth outlook accelerates, or the earnings momentum in the AI-led markets cools. He noted growth did pick up in the December quarter and improved again in the March quarter, with companies staying upbeat despite global uncertainty and the conflict in the Middle East.

The Growth Side of the Ledger

The problem is that the comparison keeps moving. Even a recovering India looks ordinary next to markets posting much larger upgrades, and positioning in South Korea, Desai noted, is now the strongest in more than a decade. Until the forward growth gap narrows, the relative case for buying India over a chip exporter stays weak.

The AI Capex That Won’t Quit

The other route looks no closer. Morgan Stanley is still raising its AI capital expenditure (capex, spending on plants and equipment) forecasts, and sees no sign of the cycle slowing over the next 12 to 18 months. The bank now pencils in more than $800 billion of hyperscaler spending in 2026, heading toward $1.1 trillion the year after, a buildout it tracks in its work on the 2026 AI infrastructure investment cycle. That spending keeps demand pointed at memory, compute and AI infrastructure, the very exposures India lacks. The same wave has put Korean chipmakers at the center of the trade, down to Korea’s memory-chip pay fight at Samsung, and pushed US platforms like Meta’s multibillion-dollar AI build-out to spend even harder. As long as that capex holds, the magnet for global flows sits outside India.

The Access Problem India Hasn’t Fixed

Desai added a practical wrinkle that gets less attention than the macro story. Even investors who want India find it fiddly to buy. The registration and administrative process remains a hurdle for overseas players who sit outside the country and want to trade Indian stocks. Finance Minister Nirmala Sitharaman’s Budget did open a door, raising the aggregate cap for persons resident outside India to 24 percent from 10 percent, lifting the individual limit to 10 percent from 5 percent, and creating a direct route through the Portfolio Investment Scheme (PIS, a channel that lets non-residents buy listed shares without going through a registered foreign fund). Even so, participation still runs through a process Desai called difficult.

On tax, he was specific about what actually deters people. Equity tax rates are not the main complaint; the paperwork around filing returns and paying tax is the bigger friction. For debt investors he suggested India revisit withholding tax, while noting those investors have kept buying despite currency losses. Any change to capital gains tax, he warned, would be hard to apply to past trades, so a prospective change would be the cleaner path if one were ever made.

He also pointed to corporate share issuance as a release valve. More supply would create room for foreigners to participate without bidding against the domestic retail wall. Without it, households keep absorbing the float.

For now the swing factor sits in one line: until India’s expected earnings growth closes the gap with Korea and Taiwan, or those markets cool, Desai expects the foreign bid to stay thin.

Disclaimer: This article is for informational purposes only and is not investment advice. Equity and foreign-flow data carry market risk, and figures cited are accurate as of publication. Readers should consult a qualified financial adviser before making investment decisions.