GMO’s view on India: growth, valuations, and the foreign capital challenge

India’s rapid economic growth, expanding consumer base, and push toward structural reforms have kept it firmly on the radar of global investors. Yet, despite strong macro data and a vibrant domestic market, foreign investors’ attitude toward India has swung sharply between optimism and caution. High valuations, geopolitical tensions, and comparisons with China’s market dynamics have made the outlook more complex than headline numbers might suggest.

To explore these themes, Martin Emery, Portfolio Strategist for GMO’s Systematic Global Macro Team, talks about the factors driving foreign sentiment toward India, how the country stacks up against other emerging markets, and what role structural reforms, U.S. monetary policy, and global geopolitics play in shaping investor flows.

Over the past decade, foreign investors have had periods of both strong enthusiasm and caution toward India. What do you think is driving the latest shift in sentiment?

India presents a complex picture for foreign investors. While recent economic growth has been strong and inflation largely contained, solid macro data doesn’t always translate into strong equity performance. Trade tensions with the U.S. and ongoing tariff issues add volatility. Corporate earnings have been underwhelming recently, leading to market weakness. Given India’s premium valuation among emerging markets, investors remain understandably cautious.

How does India compare to other major emerging markets in terms of foreign capital inflows today?

India continues to struggle to attract foreign investment, especially compared to China's explosive performance. The contrast between the two markets is stark. Since the article’s publication, foreign capital flows into India have reversed into outflows, confirming our concern that earlier inflows were likely temporary.

How important are structural reforms — such as improvements in infrastructure, tax policy, or digitization — for sustaining foreign confidence in India?

Structural reforms and improved efficiency are vital for economic progress, and the changes you mention will likely support growth. With most revenue in the Indian equity market generated domestically, these reforms and rising consumer spending should feed into market performance. However, strong economic growth doesn’t always equate to an attractive equity investment. Valuation remains a key concern. India is highly priced among emerging markets, and its long-term growth prospects may not justify such premiums.

How do U.S. interest rates, a strong dollar, and global liquidity conditions affect the way foreign investors view India?

Lower U.S. rates tend to boost global risk appetite, which could benefit India as investors seek higher returns.

With China facing structural headwinds, is India increasingly being seen as a natural alternative or complement in global emerging market allocations?

Despite structural headwinds like demographic challenges, China’s market performance this year shows that short-term momentum can overshadow long-term concerns. A surge in margin buying suggests retail investors are chasing returns, while excitement around artificial intelligence (AI) has drawn investors toward a dynamic China over a stagnant India.

India has seen significant retail investor participation domestically. Does this change how foreign inflows behave, knowing that there’s a strong local base of buyers?

It’s less about how foreign flows behave and more about their relative influence. For example, we have seen that China’s surge in retail buying has introduced speculative activity, increasing the risk of bubbles and making the market more sensitive to short-term events. Retail investing can overwhelm foreign investors.

From a systematic global macro perspective, what signals or indicators are you watching most closely to assess shifts in foreign investor sentiment toward India?

Geopolitics is emerging as a key challenge in the current environment, especially from a systematic perspective. The U.S. government’s 50% tariff on India not only impacts the economy but also undermines investor confidence and heightens uncertainty. While rate cuts could help restore sentiment, geopolitical risks are likely to dominate in the near term.

How do you assess the Indian government’s role in creating a more foreign-investor-friendly environment? Are there specific policy shifts that stand out?

Recent comments from Trump and Modi on X highlight ongoing trade negotiations between the U.S. and India. Yet only hours later, we saw the US wanting to pressure the G7 and the EU for higher tariffs on India. The negotiations between the US and India are fragile and volatile. The progress of these talks — and efforts to ease trade tensions — will be key to restoring foreign investor confidence

If foreign investors are changing their minds on India, do you think it’s a cyclical adjustment or the beginning of a longer-term structural reallocation of global portfolios?

India’s economy is strong, supported by its tech exposure and a growing middle class driving consumption. These factors make a compelling case for growth. However, valuations remain a major concern. India’s forward price-to-earnings (P/E) of 21 versus 13 for broader emerging markets reflects a steep premium. Even if geopolitical tensions ease, this valuation gap poses a challenge. As noted in our original article, foreign investors tend to favor markets with more attractive pricing, and India remains the most expensive among emerging markets.