Why Foreign Investors Are Still Underweight India: Kotak Conference Insights Reveal Caution Amid Valuations, AI Risks and Iran Conflict
Global investors remain cautious on Indian equities despite strong long-term interest in the country’s growth story. According to insights shared by Pratik Gupta, CEO and Co-Head of Kotak Institutional Equities, foreign institutional investors (FIIs) are still largely underweight on India and are waiting for a deeper market correction before increasing allocations.
The cautious stance emerged as a key takeaway from Kotak Institutional Equities’ annual investor conference held in Mumbai, which saw participation from nearly 984 investors representing 240 institutions and 246 companies.
While the conference highlighted strong global interest in India, many foreign investors attended mainly to assess opportunities and update their understanding of the market rather than deploy capital immediately.
“The strong foreign investor attendance at our conference was not because they’re looking to buy Indian stocks right away,” said Pratik Gupta.
The insights suggest that although India remains structurally attractive, investors are currently weighing factors such as high valuations, slowing growth expectations and fresh geopolitical risks.
Foreign Investors Wait for Market Correction Before Increasing India Allocation
One of the most important messages from global investors at the conference was that many funds have been underweight India for some time and are waiting for a more attractive entry point.
Several investors indicated they would consider increasing exposure only after:
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A meaningful correction in Indian equities
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Fresh inflows into emerging market funds
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More clarity on global economic conditions
India’s relatively higher valuations compared with other emerging markets have made some global funds hesitant to deploy capital aggressively at current levels.
Kotak estimates that the Nifty index is trading at around 20 times March 2027 earnings, which remains a significant premium to the MSCI Emerging Markets index.
This valuation gap is one reason why India may not currently be the top priority among emerging markets for some global investors.
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Iran Conflict Adds Fresh Layer of Caution for Global Funds
Investor sentiment has also turned more cautious following the recent escalation of geopolitical tensions involving Iran, Israel and the United States.
The conflict has raised concerns about potential disruptions to global oil and gas supplies, particularly for energy-import dependent economies like India.
“With the outbreak of the Iran conflict, the foreign investor mood has turned cautious again as India is vulnerable to disruptions in oil and gas supplies,” Gupta said.
Higher crude oil prices could increase India’s import bill, widen the current account deficit and push inflation higher — all of which can negatively impact investor sentiment.
As a result, global investors are closely monitoring geopolitical developments before increasing their allocations to Indian equities.
AI Disruption Concerns Continue to Weigh on the IT Sector
Another major theme discussed at the conference was the potential impact of artificial intelligence on India’s IT services industry.
Many US investors raised concerns about whether AI could disrupt traditional outsourcing models and reduce demand for certain IT services.
Key questions raised by investors included:
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Could AI reduce demand for traditional outsourcing services?
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Could automation lead to white-collar job losses in the IT sector?
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How quickly will companies adopt AI-driven automation?
According to Gupta, investors left the discussions with mixed views, and many remain uncertain about the long-term implications of AI for Indian IT companies.
These concerns are already visible in market performance.
The Nifty IT index has declined about 17% in the past month, significantly underperforming the broader Nifty index, which has fallen roughly 5% during the same period.
This divergence indicates that investors have been rotating away from technology stocks amid rising uncertainty.
Investors Shift Focus to Data Centre and Power Infrastructure Opportunities
While AI-related risks have created pressure on traditional IT services companies, investors are also exploring potential beneficiaries of the technology shift.
Several investors expressed interest in companies linked to data centre infrastructure and power supply, which are expected to see increased demand as AI adoption expands.
Sectors attracting investor attention include:
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Power utilities
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Transmission equipment manufacturers
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Power cable producers
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Backup power and energy infrastructure companies
The growth of data centres and cloud computing infrastructure is expected to drive significant demand for power and supporting infrastructure in the coming years.
Domestic Funds Turn Cautious on Small and Mid-Cap Stocks
The conference also revealed growing caution among domestic institutional investors, particularly those managing portfolios focused on smaller companies.
Portfolio managers, especially in Portfolio Management Services (PMS) strategies, are increasingly concerned about the liquidity of certain small- and mid-cap stocks.
“Small/mid-cap funds remain very worried about illiquid small- and mid-cap stocks in their portfolios,” Gupta noted.
Although small- and mid-cap stocks have seen corrections this year, Kotak believes valuations in many companies within these segments remain stretched.
If investor redemptions increase, illiquid stocks could face sharp price corrections.
Limited Upside for Nifty in the Near Term
Kotak Institutional Equities expects only modest upside for Indian equities in the near term, primarily due to elevated valuations.
While strong domestic inflows and India’s structural growth story continue to support the market, significant gains may be limited unless earnings growth accelerates.
Key downside risks highlighted by Kotak include:
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Prolonged conflict in the Middle East pushing oil prices higher
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A slowdown in global economic growth
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Weak monsoon affecting domestic consumption
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Slower inflows into equity mutual funds and retail investment channels
These factors could influence investor sentiment and market performance in the coming months.
Here’s What Happened Today and Why Traders Reacted
Investor sentiment toward Indian equities was shaped by several important developments highlighted during the conference.
Key triggers include:
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Foreign investors remaining underweight on India
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Concerns about high market valuations
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Rising geopolitical risks due to the Iran conflict
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AI disruption fears affecting the IT sector
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Caution among domestic investors toward small- and mid-cap stocks
These factors collectively contributed to a more cautious outlook among both global and domestic investors.
What This Means for Investors and Market Strategy
The cautious stance of foreign investors suggests that short-term market volatility may continue, especially if geopolitical risks persist or global liquidity conditions tighten.
However, analysts believe India’s long-term structural growth story remains intact.
Kotak continues to prefer sectors with strong domestic demand and earnings visibility, including:
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Large private sector banks and NBFCs
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Life insurance companies
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Telecom operators
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Domestic-focused pharma and healthcare firms
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Non-ferrous metals
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Residential real estate
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Airlines and hospitality
At the same time, the brokerage remains cautious on certain consumer stocks, oil and gas companies and chemical firms due to valuation and macroeconomic risks.
For investors, the current environment highlights the importance of selective stock picking and disciplined portfolio allocation, as global uncertainties and valuation concerns continue to shape market sentiment.
