Investors in Indian equities have had to contend with shifting global conditions this year, from volatile energy prices to changing appetite for emerging markets says Marcus Weyerer, Director of ETF Investment Strategy at Franklin Templeton.
As some of the pressures ease, attention is returning to the factors that could support India’s longer-term investment case.
Indian equities may be reaching an inflection point. After a difficult period in which the Middle East conflict pushed energy prices higher and interrupted a recovery in investor demand, several indicators now point to a more supportive near-term environment.
Oil prices have fallen sharply from their recent highs, geopolitical fears have moderated for now, foreign investor interest is beginning to return, and India has started to outperform broader emerging markets.
A sharp reversal in ETF flows
The flow data tell a clear story. In February, US- and EMEA-listed India ETFs took in US$836 million, their strongest monthly intake since June 2024. That took cumulative net inflows to a record high.
The picture changed quickly as conflict in the Middle East escalated and energy markets repriced. India is a large oil importer, so a sustained rise in crude prices directly affects inflation, the current account and corporate margins. During March and April, India ETFs saw combined outflows of US$3.1 billion.
The latest data suggest that this retreat is beginning to reverse. India ETF flows were running at approximately US$1.1 billion for November as of 11 November, a strong early-month pace.
One month does not establish a trend, particularly after a period of heavy outflows, but it suggests investors are willing to reassess the market as the pressure from energy and geopolitics eases.
Why India may be back on investors’ radar
Diversification from the AI trade. India has historically shown a moderate correlation with US equities and the US technology sector.
For investors reassessing concentration in the AI infrastructure and mega-cap technology trade, India offers exposure to a different set of earnings drivers: domestic consumption, investment, financial deepening and formalisation of the economy. The 52-week rolling correlation with the Nasdaq 100 has fallen to 0.1, just as the November tech sell-off resumed after the US midterms.
Lower oil prices. Brent crude has retreated by nearly US$30 per barrel from its recent peak. This matters disproportionately for India because it imports most of its oil needs. Lower energy costs can improve the inflation outlook and relieve pressure on household spending, corporate margins and the trade balance.
A lower geopolitical risk premium. The risk of further military escalation has receded since the immediate post-midterm period. The conflict remains a live risk and markets can change quickly, but investors no longer appear to be pricing the same degree of disruption to regional energy supply.
Improving relative performance. India’s three-month performance relative to broad emerging markets has strengthened to its best level since the summer of 2024.
Relative momentum is not a reason to buy by itself, but a sustained improvement alongside recovering flows would be useful confirmation that investor sentiment may indeed be changing.
A constructive but selective case
The case for India is improving, rather than complete. A renewed surge in oil prices, an escalation in the Middle East, a weaker rupee or disappointment in earnings would all challenge the recovery. Valuation also remains an important consideration after India’s long period of structural outperformance.
Nevertheless, the combination of lower oil, improving ETF demand and better relative returns suggests that the market is moving beyond the acute shock seen earlier this year.
For investors, the key question is not whether India is insulated from global risk.
It is whether the country’s distinct growth drivers can again attract capital as portfolios seek diversification beyond an increasingly narrow global technology trade. The early signs are encouraging. We will be watching whether November’s flow recovery broadens and persists.
For now, a selective approach remains warranted. The durability of India’s recovery will depend on both a supportive external environment and the ability of companies to deliver earnings growth at valuations investors are willing to pay.
If those conditions align, India’s domestic growth story could once again command greater attention in global portfolios.
Main image: india, martin-jernberg-nE2gf1scItI-unsplash
