“What matters most to investors is earnings downgrades and upgrades,” Nemkumar told ET Now. “Over the last 30 years, that has been the single most consistent driver of flows and valuations — not macro news, not GDP growth rates in isolation.”
The anatomy of India’s FII outflows
The exodus of foreign portfolio investors from Indian equities is not, Nemkumar argues, a story about geopolitics or macro uncertainty alone. It is primarily a story about valuation and relative earnings momentum. Between 2021 and September 2024, India was in a sustained earnings upgrade cycle — a period that coincided with dramatic multiple expansion, particularly in mid- and small-cap stocks. India’s index premium over other emerging markets reached near all-time highs.
Then came the reversal. Consumption-linked companies saw earnings cuts of 20% or more. Multiples unwound. And with higher-quality earnings stories available elsewhere — Korean memory chip stocks delivering triple-digit upgrades, Brazilian commodity producers riding hard-asset price surges — global allocators had compelling reasons to rotate away.
The domestic buffer: Strength or double-edged sword?
One of the most distinctive features of the current cycle has been the resilience of domestic institutional investors, whose sustained SIP and mutual fund inflows have absorbed much of the FII selling pressure. In a prior era, the scale of FII outflows seen would have triggered a far sharper correction — and potentially a faster valuation reset that would itself attract foreign capital back sooner.
Nemkumar acknowledges the paradox. The value readjustment that would have followed such FII selling would have been quicker, he explained, creating the conditions for flows to return faster.
Domestic buying has delayed that process. He also noted that these inflows enabled over $40 billion in PE fund exits during this period — further absorbing domestic buying capacity without driving the kind of price discovery that lures foreign capital back in.
When will the cycle turn?
On the critical question of earnings trajectory, Nemkumar is cautiously optimistic but measured. Q3 results showed the pace of downgrades slowing — an encouraging sign that the trough may be near. However, he stopped short of predicting an imminent broad-based upgrade cycle. A big earnings upgrade in the near term is unlikely, he said. More time is needed.
The more actionable catalyst, he suggests, could come from how analysts frame FY28 projections. In the next three to six months, market participants will begin building out FY28 forecasts, and even marginal upgrades at that horizon can have a meaningfully positive effect on valuations and sentiment.
The core message for investors is this: India’s structural growth story remains intact, but the market’s next leg up depends on a clean turn in the earnings revision cycle — not just stabilisation. Until that data arrives, patience is the most defensible position.