India's Emerging Market Positioning Reset as Risk Sentiment Shifts

Market Sentiment Soars in Risk-Off Phase Amid Geopolitical Tensions

India has been in a sustained foreign institutional investor (FII) risk-off phase since late 2024, which intensified in March amid rising geopolitical tensions and oil-price volatility. Sentiment softened as the expected duration of the conflict became less clear, raising concerns about domestic growth and potential earnings downgrades as crude moved above $100. FII outflows, profit booking by retail investors, and a moderation in domestic institutional investor (DII) buying together amplified the decline in equity markets. FIIs have sold about $16.5 billion over the past 12 months in India, of which $11.5 billion is in this month, among the highest across emerging markets.

A key driver of the selling has been India’s premium valuation. As a result, market valuations have corrected toward the lower end of their five-year range after historically trading at a premium supported by strong macro fundamentals and robust domestic participation. The Nifty 50 is down 13.5% from its 52-week high. This correction puts the market in a more favorable position for a rebound, assuming the geopolitical conflict remains short-lived.

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Several rated stocks and sectors have seen sharp declines in both prices and valuations, creating selective opportunities.

Despite the correction, uncertainty remains elevated given limited signals of a near-term resolution, leaving room for further consolidation. On longer-term valuation metrics (for example, Nifty forward P/E versus its own 15-year average), India does not yet screen compelling enough to justify a broad rerating. The Nifty 50 currently trades at a one-year forward P/E of 17.7x versus a 15-year average of 17.0x (a modest premium).

Looking ahead to the next ~10 days, outcomes from West Asia peace talks and India’s relative positioning within emerging markets will be important for FII sentiment. India’s valuation in US-dollar terms has eased from ~21–22x to ~19x over the past year, but it remains elevated versus its own history. The valuation premium has contracted from ~100% to ~60–65%, which is close to the long-term average—suggesting flows could stabilise gradually.

Historically, geopolitical conflicts tend to increase volatility and weigh on near-term equity performance, but they can also create attractive entry points for long-term investors. A similar pattern is plausible this time: ongoing FII selling and softer domestic inflows (both DII and retail) could improve prospective entry levels, although near-term downside risks remain. Extending the peace-talk window from five days to ten days keeps hopes of resolution alive but also prolongs uncertainty and the risk of further earnings pressure in the near term.

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