The Indian equity markets continue to notably underperform its global peers, despite assurances of a resilient economy and decent corporate performance. Experts have attributed the underperformance to incessant selling by the foreign investors and geopolitical uncertainties. Both are valid reasons. But I do not think these explain the full picture.
Foreign selling is an effect, not a cause
Foreign portfolio investors (FPIs) have been net sellers in four out of the past five years. Obviously, they are not selling for fun. Something seems to have changed in how they see the risk and the return from India. The selling, therefore, tells us “what” is happening, not “why”.
Part of the “why” is global. Treasury bonds in the developed economies are yielding highest in over two decades, providing global investors a safer option to invest. The rupee is flirting with 96 to the dollar, which cuts dollar returns even when the Nifty stays flat. Neither of these is India-specific. They hit every emerging market.
Geopolitics is affecting India mostly through oil and other raw materials. Expensive crude, chemicals, metals, etc. means higher imported inflation and a weaker rupee. That is a real cost, but the economy is absorbing it. The RBI’s own estimate for FY27 growth stands at 6.7%, after the oil shock and the weaker rupee are already in the numbers. Domestic institutions are also buying, so net flows (FPI plus DII) remain positive. A market that falls under these conditions is telling us that the risk premium foreign investors are willing to pay for India has changed.
The one cause that is in our own hands
I think, among other things, policy and legal uncertainty is one of the reasons global investors are staying away. I have highlighted this before (see here). The government itself acknowledged it in an Economic Survey (see here). Over the past decade, India has seen more than one sudden shock. The retrospective tax of 2012 was repealed only in 2021, after costly arbitration losses. The higher surcharge on FPIs in the 2019 Budget was rolled back within weeks. Each was corrected in the end. But the correction came after the damage, and that pattern is what erodes the trust between government and enterprise.
Two recent instances are noteworthy in this context.
Tiger Global: the ruling and the repair
In January this year, the Supreme Court ruled that Tiger Global must pay capital gains tax in India on its 2018 sale of Flipkart shares to Walmart. The court found that Tiger Global’s Mauritius entities acted as simple conduits for tax avoidance rather than active local businesses. The court emphasized that a Tax Residency Certificate (TRC) issued by Mauritius no longer automatically guarantees tax treaty relief. Tax authorities can look past paperwork to see where real control and business decisions happen. The judgement said India’s General Anti-Avoidance Rules (GAAR) can override older treaty benefits if an arrangement lacks commercial substance, even for older investments.
To be fair, I would not defend a structure with no commercial substance. The court was enforcing an existing anti-avoidance law, not inventing a new one. The real difficulty is for investors who believed that investments made before April 2017 were protected, which is what the 2016 treaty protocol seemed to promise.
On March 31, 2026, the CBDT amended the GAAR rules so that income from the transfer of investments made before April 1, 2017 stays outside GAAR. That is a welcome step. But the issue may not be closed yet. The “substance over form” reasoning and treaty-level anti-abuse clauses are still available to the tax department, and it is not clear that the relief reaches Tiger Global itself. Shock first, patch later, some doubt left over. That is a worrying pattern for investors.
Prima facie, this mostly concerns private equity and venture capital investors, not the FPIs selling listed shares. But long-term capital talks to each other. What one set of investors learns about exit risk soon becomes part of how everyone prices India.
Hospitals: a risk building, not yet a shock
The healthcare sector in India has attracted substantial foreign capital in the past decade. Foreign investors now hold material stake in most of the corporate hospital chains in India. Recently, the Supreme Court of India criticized corporate hospitals for overcharging patients and suggested that they should be operating as service providers rather than attempting to maximize profit. The government is yet to clarify its stand on the issue, creating significant uncertainty for foreign investors who have invested heavily in Indian hospitals.
If a margin cap is actually imposed, it will come with little notice and no transition. Investors have seen that film before.
What I make of it
The message from these episodes seems to be that India is no haven for those looking for tax arbitrage or policy loopholes. The call reads as “either play by the rules or leave”. That is a fair position for any country, provided the rules are clear and known before the money goes in. Investors can live with strict rules. What they cannot price is a rule that gets interpreted or redrawn after they have invested. For now, foreign money’s verdict seems to be to trim exposure.
Investor takeaways
· FPI selling is not a verdict on India’s growth. The growth is decent. But do not dismiss it either; markets sometimes see risks before the data does.
· Watch the follow-through, not the headline. The final government stance on hospital pricing, and how the tax department applies the GAAR amendment in pending cases, will tell us more than any media headline.
· Treat price-regulation risk in listed hospital chains as a real input to valuation, not as noise.
· Stay selective on FPI-dependent segments until there is more clarity. Domestic flows are a cushion, not a substitute.
· Do not assume that a patch for one problem means the pattern has ended. Look at how quickly and how clearly the next one is handled.