$320 billion danger: Jefferies warns 70 large EM funds are underweight India

Even after foreign institutional investors (FIIs) have pulled out billions of dollars from the Indian stock market since September 2024 to record the worst sell-off ever, global brokerage firm Jefferies has warned that their interaction with emerging market funds show that India remains a consensus underweight and is unlikely to change in a hurry.

The brokerage's analysis of 70 large EM funds with a combined assets under management of approximately $320 billion as of March 2026 shows that 61% of investors are underweight India, with positioning at 0.4 percentage points underweight compared to their MSCI EM benchmark.

"Over the past few weeks, we interacted with 50+ investors in the US. India is a consensus UWT for FPIs and that's unlikely to change in a hurry. Relative valuation vs growth continues to be a key concern on India. FPIs would look to get some clarity on the AI/DRAM theme to peak before taking a more meaningful bet on India. However, a churn towards newer ideas/hard assets (power, hospitals, airports, real estate) is likely," Jefferies equity analyst Mahesh Nandurkar said in a report.


He said relative valuation vs growth continues to be a key concern on India, with MSCI India trading at 19.8x one-year forward P/E, implying a 70% premium to emerging market peers.

This valuation premium is "in line with its 10-year average" despite EPS growth lagging EM peers by approximately 49 percentage points in CY26E/FY27E. The brokerage noted that "even after excluding the top three beneficiaries of the AI-led earnings upgrade cycle (Samsung, SK Hynix, TSMC), India's EPS growth still trails EMs".

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Rupee, El Niño Risks

The Indian rupee has emerged as a primary concern, with Jefferies reporting that "the INR has been among the weakest-performing major currencies, declining by approximately 5% year-to-date in CY26 and approximately 13% cumulatively since September 2024".

The rupee weakness is "primarily driven by subdued capital account flows (FY25-26 average at approximately 0.3% of GDP, all-time low)" rather than current account pressures. Additionally, the Indian Meteorological Department projects the Jun-Sep 2026 monsoon "is expected to be deficient, with rainfall projected at approximately 10% below normal," raising El Niño concerns.

Despite broad underweight positioning, Jefferies is recommending a strategic pivot toward "hard assets" including power utilities, hospitals, airports, and real estate, with their model portfolio holding a 20% allocation to these sectors versus just 8% in the MSCI India benchmark. The report highlights that "industrial and power utilities is now the second largest sector in the MSCI India benchmark at 13%," following banks' 20% weight. Top picks in this space include JSW Energy, Adani Ports, AESL, Premier Energies, GMR Airports, Lodha and GPL.

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FII Positioning Light Even on Breadth

The underweight positioning represents a dramatic departure from historical norms, with the current 0.4 percentage point underweight "significantly lower than 10-year average" overweight levels. The report states that "the FPI positioning is light even on breadth, with the majority (61%) of funds UWT on India," marking a significant intensification through the June quarter. This positioning contrasts sharply with the 10-year average where EM funds typically maintain an overweight of 2 to 3 percentage points in Indian equities.

Jefferies analysts project that earnings growth will improve in FY27E–FY28E, though it is likely to continue lagging emerging market peers. The gap is expected to narrow in CY27E/FY28E, but "it remains adverse for India" in the near term.

The brokerage noted that "historically, during periods of relatively lower earnings growth (CY16–18), India's valuation premium averaged close to 40%." However, "this time, strong domestic flows may partly justify elevated premiums."

The report cautioned that "FPIs would look for greater clarity on whether the AI/DRAM theme has peaked before taking a more meaningful bet on India," suggesting foreign inflows may take time to turn despite resilient domestic participation.

Jefferies added that "a churn towards newer ideas/hard assets (power, hospitals, airports, real estate) is likely," indicating a strategic shift in investment preferences. The brokerage emphasized that "India still trades at an approximately 70% premium to EMs despite lower EPS growth," underscoring elevated valuations amid relatively weaker earnings growth.