$25 billion FII comeback? HSBC explains why foreign money may return to India

India may be one portfolio rebalance away from attracting about $25 billion in foreign equity inflows, as global fund managers seek shelter from volatility in AI-heavy Asian markets, according to HSBC.

More than 80% of active global emerging-market funds are underweight India. If those funds simply restore their allocations to neutral, the shift could generate around $25 billion of inflows, HSBC strategists Prerna Garg, Herald van der Linde and Yogesh Aggarwal said in a report.

“FII outflows linked to AI rotation have largely played out,” the strategists said. A return to neutral by underweight funds alone “could drive around USD25bn of inflows.”


The potential reallocation would mark a significant reversal for Indian equities after foreign investors diverted capital toward markets benefiting more directly from the artificial-intelligence trade. HSBC now sees those positions becoming increasingly crowded, while sharp swings in AI-exposed markets are strengthening India’s appeal as a diversification play.

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Early signs of a shift are already visible. Foreign investors have purchased $3.6 billion of Indian equities since mid-June, when India began outperforming the wider region. Indian stocks have risen about 6% over that period, according to the report.

Financials, consumer discretionary companies and healthcare attracted the largest foreign portfolio inflows between June 15 and July 15. Global funds have also started expanding their exposure to India and mainland China while remaining heavily invested in South Korea and Taiwan.

India’s relative stability is central to HSBC’s thesis. South Korean equities have been about four times as volatile as Indian stocks this year, and local leverage could keep volatility elevated there. Structural constraints may also limit the capacity of foreign investors to add substantially to their already large positions in South Korea and Taiwan.

The prospective return of foreign capital would add to persistent domestic demand. Systematic investment plan contributions to mutual funds continue to hold up, while net equity fund inflows recovered in June, with a large share directed toward small- and midcap funds. Even modest but consistent foreign buying could therefore provide meaningful support to the market, HSBC said.

The bank’s case is also underpinned by an improving domestic growth and earnings backdrop. About 73% of companies that had reported first-quarter fiscal 2027 results by the end of July either met or exceeded expectations. Earnings beats have increased, while downgrades have become fewer and smaller.

Non-food credit growth accelerated to 18.3% in June from about 10% in late 2025, and automobile demand has remained stronger than expected. Consensus earnings estimates have been upgraded for commodities, financials, industrials and consumer staples.

The earnings outlook, however, is not uniformly compelling. Consensus forecasts point to Indian earnings-per-share growth of about 14% in 2026 and 17% in 2027, trailing the stronger growth expected in South Korea and Taiwan.

Valuations remain another constraint. India continues to command the most demanding multiples in the region, though its premium over emerging-market peers has normalised. Relative to its own history, the market is trading near the lower end of its valuation range. Multiples have eased particularly in financials, real estate and information technology.

Which stocks to buy before FIIs return?

Against this backdrop, HSBC has upgraded India to neutral within its Asia strategy. The bank favours high-quality growth companies exposed to domestic demand, particularly in financials, automobiles, retail, services and hospitals.

Private banks and real estate appear relatively attractive after a prolonged period of underperformance. HSBC also sees growth opportunities among non-bank lenders, with a preference for companies carrying limited rural exposure.

Within consumption, the bank prefers discretionary companies over staples, which are more expensive and more exposed to rural demand and rising food inflation. It also favours selected industrial companies positioned to benefit from data centres, electrification, semiconductor investment and government policy support.

HSBC’s preferred stocks include ICICI Bank, Cholamandalam Investment and Finance, Titan, Mahindra & Mahindra, Phoenix Mills, Fortis Healthcare, Cummins India, Syrma SGS Technology, Adani Ports and Special Economic Zone, and Hindalco Industries.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)