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What is the story about?
Foreign investor interest in India remains low because global investors are finding stronger earnings growth opportunities in markets tied to the artificial intelligence (AI) supply chain, according to Ridham Desai, Chief Equity Strategist, India, at Morgan Stanley.
Speaking at the Morgan Stanley Investor Forum 2026, Desai said the global AI-led capital expenditure cycle remains intact and is unlikely to slow over the next 12 to 18 months.
"The expectations have to pivot," Desai said, referring to the relative growth outlook between India and global markets. "The earnings growth in Korea, Taiwan, Japan, the US, and even parts of Europe is way above India's growth, and this is not like a 2-3% point thing. So, if India is doing 12%, 13%, or 14% earnings growth, these markets are experiencing 30%, 40%, and 50%, and Korea is in the hundreds. So that's where things stand.".
Morgan Stanley is only upping its capex forecast for AI and sees no visible signs of a slowdown in spending across the AI supply chain.
Despite weak foreign participation, Desai said domestic retail investors continue to provide strong support to Indian equities. He pointed to record inflows during periods of market volatility and said the trend reflects a long-term shift in household savings towards equities.
According to Desai, another route for foreign investors to increase exposure to India could come through a revival in corporate equity issuances. He said additional supply in the market would create room for overseas investors to participate without competing directly with domestic retail flows.
On foreign portfolio flows, Desai said part of the recent selling has been driven by passive investment strategies rather than active decisions to reduce India exposure. As India's weighting in global indices changes with relative performance, passive funds are required to adjust holdings accordingly, contributing to continued outflows.
This is an edited transcript of the interview.Q: It's not very demanding. It's not as if this is a raging bull market. I'm just starting with the fact that sentiment is quite negative. There's a flavour of self-loathing now, which is kind of - we don't have AI, we don't have this, we don't have that, and all kinds of things, right? So, it's almost very tough to justify a kind of bullish view. So that is where sentiment is at. So just talk us through the conference and what you aim to convey to your investors from the conference. The message straight up.
A: The interest level in India is very low. That's the bottom line, and the reason is that on a relative basis, India is not looking good on growth. It's looking very good on valuations, but it's looking very inferior on growth.
If you compare it with other large markets, and AI is an excuse, the real deal is growth, and this has not been the situation only for the last two or three months. It's been the situation since September of 2024, when India's growth peaked, valuations peaked, and since then the market has derated on a relative basis, and growth has been decelerating.
Growth did pick up in the December quarter. It's picked up a fair bit in the March quarter. Companies are quite positive, and they're guiding positively, despite the global uncertainty, despite the conflict in the West Asia. But growth elsewhere is very strong.
The earnings growth in Korea, Taiwan, Japan, the US, and even parts of Europe is way above India's growth, and this is not like a 2-3% point thing. So, if India is doing 12%, 13%, or 14% earnings growth, these markets are experiencing 30%, 40%, and 50%, and Korea is in the hundreds. So that's where things stand.
Also Read | CLSA sees no near-term breakout for Nifty, prefers midcaps on dips
This thing, with respect to foreign investors, only flips when the growth expectations flip. It's not when the growth flips, because that will be too late, but when the expectations flip. So, something has to give in the memory cycle for Korea's growth to go down. Something has to give in the compute cycle for Taiwan's growth to decelerate, and so on. So that's not something that's visible.
In fact, the capex in the world has been very resilient, and it has not reacted to the uncertainty coming from the conflict, which is why markets elsewhere outside India are all hitting new highs, and not just soft new highs, but strong highs. Korea is up 60% from its March-end low.
Q: It's up 100% YTD, and it was up 75% last year. And, of course, Taiwan has done what it has. Are you saying that for FII flows to flip, that flip, as you put it, this memory trade in North Asia, or the entire AI capex frenzy, has got to end because those are the beneficiaries? That's where that money is going. So that needs to slow down a little bit for investors, foreign investors, to pay attention to India.
A: It's about expectations. The expectations have to pivot. The expectations that this is going to generate more and more growth have to change, and India's growth expectations have to accelerate.
Q: So, both have to happen.
A: Both or one. The relative growth picture has to change with respect to forward expectations.
Q: Is there any sign of the former happening?
A: No. If you look at Morgan Stanley estimates, we are only upping our capex forecast for AI, and a lot of this has to do with the AI supply chain. So, there is no visible sign that this is about to slow down. That's not on the horizon.
Q: If anything, I've seen numbers which say that it's going to accelerate all the way to 2028, maybe even beyond and you're kind of agreeing with that, right? That's your expectation.
A: 2028 is far away, but it's there for 2027. So, if you're looking at it from a near-term perspective, over the next 12 to 18 months, this capex cycle is pretty intact, and it is not seemingly going away.
Q: So where does that leave us?
A: So, India's growth is accelerating, and at some point in time, the valuations relative to growth opportunities do become attractive. And of course, see, there is a technical aspect to this. Retail investors in India are just not stopping the bid.
So, in March, you would have ordinarily expected retail investors to be a little bit hesitant because the markets were volatile. There was bad news. There was a drawdown, but they put in record inflows, and they followed up with another strong April. And I think the May month also has been probably very strong, going by the amount of buying that domestic funds have done. So, if that bid is on, then there has to be a seller. Now, there can potentially be two sellers. There can be corporate issuances, and there can be foreigners.
So, the other way that foreigners can become buyers is that corporate issuances resume. It's counterintuitive, but that will be good for the supply. That will be good for the overall bid on the market. It will be good for the BOP. It will be good. So, it's counterintuitive, but issuances can make a difference here.
Q: The foreigners can come back and participate in those issuances.
A: Because then they get space to come into the market. Otherwise, retail has just kind of taken them out.
Q: That bid has been absolutely strong.
A: And I don't expect the retail bid to go away, because that's a secular shift that's underway in India. We have been talking about that for 11 years now, and now finally that scepticism is fading. But, people are waiting for the day when retail will panic. But retail has matured through this, and they are upping their equity allocation, rightfully so, in my view. In the long run, this is going to pay off quite well for them.
Q: You started by saying that there is very low foreign interest in India at this point in time. You've done this conference, what, 20-plus years?
A: 28 years.
Q: And if we were to sort of plot the interest level of foreign investors through those 28 conferences, where are we now? Are we pretty much at the low lows?
A: No, we've been through these. Like 2011–2012 was very bad. I should have been ready with this data. I am not. We should see the data. But when we were doing this conference in the early 2000s, like in 2003, we used to write a conference book. Now we don't do it. So, I used to write the preface.
India's market cap in 2003 was $100 billion because I remember writing this, that 50% of India's market cap would be represented at our summit. $50 billion dollars was here. So, we have come a really long way. It's difficult to make comparisons on the basis of numbers because the market is now up 45 times. It's much larger, it's sized up, it's a player in the global market.
Q: Just to complete the foreigner point - this constant selling that we're seeing. I was speaking to somebody, and I was kind of surprised to hear it, that typically we get asked whether foreigners are calling up and asking what should we buy. But this gentleman, again from a foreign firm, said, "Well, I am getting questions of what can we sell?" to increase allocation to these other markets that you were talking about. Is that something you pick up as well? Because that foreign selling is showing up on the screen every day.
A: Foreigners are also selling Korea.
Q: But then it's more technical.
A: But this is also technical. A large part of the outflows are passive. It's because the weight is falling because India is underperforming, and every single day India underperforms, the weight falls, and passives have to adjust their positions to match the index weight.
Also Read | Stay the course in equities; pharma and auto ancillaries remain attractive: Devina Mehra
Q: The flow bit, it's not active discretionary reallocation or that kind of thing? Or that has already happened?
A: There is that also, but there's a fair bit of passive in this. So, it has got a circularity to it. The opposite of this was happening in 2024, which is why India's valuations got stretched, and now it's going the other way, and that's why it's getting depressed. And the passive thing has gained share globally in total assets under management and is a dominant price mover. It is not going to react to valuations, or react to relative growth opportunities. It's in the active bit, but the active bit has lost share. So that is part of the problem.
Just going back to the FPI question, of course, relative growth needs to get fixed, or we can have corporate issuances. But we can also do adjustments on the policy front.
For example, we should make it easier for foreigners to participate, and that is, I think, something that should be done over the next few months because it takes a lot of time for people to get registered. If I want to trade US stock, I just have to go to one of the broker's websites, register myself, and I'm up for trading in five minutes. That ease of trading exists in that market.
For the full interview, watch the accompanying videoQ: I remember at the CNBC-TV18 forum, the Securities and Exchange Board of India (SEBI) chairman was there, and I think you and others made that point to him, that the time for registration, the time between submitting the application and being able to participate, was very long. And we got that feedback as well. But that is still an issue, that is still a niggle.
A: For example, in the Budget, we increased the limit for non-residents, which includes non-Indians, to buy up to 24%. But they still have to go through a process which makes it rather hard for them to participate easily. It's not like a decision I make today, where I want to buy Indian stocks and I'm up and ready for trading this morning. I can't take a decision at 8 o'clock in the morning to trade at 9:15 if I am sitting outside India without an approval, and that can change, and it can become a lot easier. There are concerns around round-tripping, etc., but there is room for us to make it easier.
On the debt side, there is room for us to reconsider withholding tax because debt investors don't do it. And debt investors, surprisingly, have stayed invested. They have not exited. They have been buying, and this is despite the losses they are suffering on the currency.
Q: What about taxation, equities taxation?
A: So taxation, I don't think is a burning issue in my view. The issue about taxation is the whole administrative process to file returns and to pay the tax. It's not about the tax itself. And, it reminds me of what my father told me in the 80s when I was filing my tax returns for the first time. I was still a teenager, filing my tax returns, and I was complaining to him that I now have to pay tax. So, he said, "Beta, you made money, so that is why you're paying tax. So never be unhappy about paying tax."
The fact is that a lot of foreigners who probably are not making money now are selling, and so they're not paying the tax. So, tax is not such a burning issue. The administrative process around that could be. But easier access is probably the better thing if you want to choose amongst policies, and that's the easier thing to fix. Also, capital gains tax can be a tricky thing. You can't do it retrospectively. Because if you do it, suppose hypothetically you reduce long-term capital gains tax to zero, it's going to trigger a selling avalanche because now I can take all my gains without paying tax. Who knows where the tax will be in three or four years? So, it can't be done retrospectively. It can only be done prospectively, if at all.
Catch all the latest updates from the stock market here
Speaking at the Morgan Stanley Investor Forum 2026, Desai said the global AI-led capital expenditure cycle remains intact and is unlikely to slow over the next 12 to 18 months.
"The expectations have to pivot," Desai said, referring to the relative growth outlook between India and global markets. "The earnings growth in Korea, Taiwan, Japan, the US, and even parts of Europe is way above India's growth, and this is not like a 2-3% point thing. So, if India is doing 12%, 13%, or 14% earnings growth, these markets are experiencing 30%, 40%, and 50%, and Korea is in the hundreds. So that's where things stand.".
Morgan Stanley is only upping its capex forecast for AI and sees no visible signs of a slowdown in spending across the AI supply chain.
Despite weak foreign participation, Desai said domestic retail investors continue to provide strong support to Indian equities. He pointed to record inflows during periods of market volatility and said the trend reflects a long-term shift in household savings towards equities.
According to Desai, another route for foreign investors to increase exposure to India could come through a revival in corporate equity issuances. He said additional supply in the market would create room for overseas investors to participate without competing directly with domestic retail flows.
On foreign portfolio flows, Desai said part of the recent selling has been driven by passive investment strategies rather than active decisions to reduce India exposure. As India's weighting in global indices changes with relative performance, passive funds are required to adjust holdings accordingly, contributing to continued outflows.
This is an edited transcript of the interview.Q: It's not very demanding. It's not as if this is a raging bull market. I'm just starting with the fact that sentiment is quite negative. There's a flavour of self-loathing now, which is kind of - we don't have AI, we don't have this, we don't have that, and all kinds of things, right? So, it's almost very tough to justify a kind of bullish view. So that is where sentiment is at. So just talk us through the conference and what you aim to convey to your investors from the conference. The message straight up.
A: The interest level in India is very low. That's the bottom line, and the reason is that on a relative basis, India is not looking good on growth. It's looking very good on valuations, but it's looking very inferior on growth.
If you compare it with other large markets, and AI is an excuse, the real deal is growth, and this has not been the situation only for the last two or three months. It's been the situation since September of 2024, when India's growth peaked, valuations peaked, and since then the market has derated on a relative basis, and growth has been decelerating.
Growth did pick up in the December quarter. It's picked up a fair bit in the March quarter. Companies are quite positive, and they're guiding positively, despite the global uncertainty, despite the conflict in the West Asia. But growth elsewhere is very strong.
The earnings growth in Korea, Taiwan, Japan, the US, and even parts of Europe is way above India's growth, and this is not like a 2-3% point thing. So, if India is doing 12%, 13%, or 14% earnings growth, these markets are experiencing 30%, 40%, and 50%, and Korea is in the hundreds. So that's where things stand.
Also Read | CLSA sees no near-term breakout for Nifty, prefers midcaps on dips
This thing, with respect to foreign investors, only flips when the growth expectations flip. It's not when the growth flips, because that will be too late, but when the expectations flip. So, something has to give in the memory cycle for Korea's growth to go down. Something has to give in the compute cycle for Taiwan's growth to decelerate, and so on. So that's not something that's visible.
In fact, the capex in the world has been very resilient, and it has not reacted to the uncertainty coming from the conflict, which is why markets elsewhere outside India are all hitting new highs, and not just soft new highs, but strong highs. Korea is up 60% from its March-end low.
Q: It's up 100% YTD, and it was up 75% last year. And, of course, Taiwan has done what it has. Are you saying that for FII flows to flip, that flip, as you put it, this memory trade in North Asia, or the entire AI capex frenzy, has got to end because those are the beneficiaries? That's where that money is going. So that needs to slow down a little bit for investors, foreign investors, to pay attention to India.
A: It's about expectations. The expectations have to pivot. The expectations that this is going to generate more and more growth have to change, and India's growth expectations have to accelerate.
Q: So, both have to happen.
A: Both or one. The relative growth picture has to change with respect to forward expectations.
Q: Is there any sign of the former happening?
A: No. If you look at Morgan Stanley estimates, we are only upping our capex forecast for AI, and a lot of this has to do with the AI supply chain. So, there is no visible sign that this is about to slow down. That's not on the horizon.
Q: If anything, I've seen numbers which say that it's going to accelerate all the way to 2028, maybe even beyond and you're kind of agreeing with that, right? That's your expectation.
A: 2028 is far away, but it's there for 2027. So, if you're looking at it from a near-term perspective, over the next 12 to 18 months, this capex cycle is pretty intact, and it is not seemingly going away.
Q: So where does that leave us?
A: So, India's growth is accelerating, and at some point in time, the valuations relative to growth opportunities do become attractive. And of course, see, there is a technical aspect to this. Retail investors in India are just not stopping the bid.
So, in March, you would have ordinarily expected retail investors to be a little bit hesitant because the markets were volatile. There was bad news. There was a drawdown, but they put in record inflows, and they followed up with another strong April. And I think the May month also has been probably very strong, going by the amount of buying that domestic funds have done. So, if that bid is on, then there has to be a seller. Now, there can potentially be two sellers. There can be corporate issuances, and there can be foreigners.
So, the other way that foreigners can become buyers is that corporate issuances resume. It's counterintuitive, but that will be good for the supply. That will be good for the overall bid on the market. It will be good for the BOP. It will be good. So, it's counterintuitive, but issuances can make a difference here.
Q: The foreigners can come back and participate in those issuances.
A: Because then they get space to come into the market. Otherwise, retail has just kind of taken them out.
Q: That bid has been absolutely strong.
A: And I don't expect the retail bid to go away, because that's a secular shift that's underway in India. We have been talking about that for 11 years now, and now finally that scepticism is fading. But, people are waiting for the day when retail will panic. But retail has matured through this, and they are upping their equity allocation, rightfully so, in my view. In the long run, this is going to pay off quite well for them.
Q: You started by saying that there is very low foreign interest in India at this point in time. You've done this conference, what, 20-plus years?
A: 28 years.
Q: And if we were to sort of plot the interest level of foreign investors through those 28 conferences, where are we now? Are we pretty much at the low lows?
A: No, we've been through these. Like 2011–2012 was very bad. I should have been ready with this data. I am not. We should see the data. But when we were doing this conference in the early 2000s, like in 2003, we used to write a conference book. Now we don't do it. So, I used to write the preface.
India's market cap in 2003 was $100 billion because I remember writing this, that 50% of India's market cap would be represented at our summit. $50 billion dollars was here. So, we have come a really long way. It's difficult to make comparisons on the basis of numbers because the market is now up 45 times. It's much larger, it's sized up, it's a player in the global market.
Q: Just to complete the foreigner point - this constant selling that we're seeing. I was speaking to somebody, and I was kind of surprised to hear it, that typically we get asked whether foreigners are calling up and asking what should we buy. But this gentleman, again from a foreign firm, said, "Well, I am getting questions of what can we sell?" to increase allocation to these other markets that you were talking about. Is that something you pick up as well? Because that foreign selling is showing up on the screen every day.
A: Foreigners are also selling Korea.
Q: But then it's more technical.
A: But this is also technical. A large part of the outflows are passive. It's because the weight is falling because India is underperforming, and every single day India underperforms, the weight falls, and passives have to adjust their positions to match the index weight.
Also Read | Stay the course in equities; pharma and auto ancillaries remain attractive: Devina Mehra
Q: The flow bit, it's not active discretionary reallocation or that kind of thing? Or that has already happened?
A: There is that also, but there's a fair bit of passive in this. So, it has got a circularity to it. The opposite of this was happening in 2024, which is why India's valuations got stretched, and now it's going the other way, and that's why it's getting depressed. And the passive thing has gained share globally in total assets under management and is a dominant price mover. It is not going to react to valuations, or react to relative growth opportunities. It's in the active bit, but the active bit has lost share. So that is part of the problem.
Just going back to the FPI question, of course, relative growth needs to get fixed, or we can have corporate issuances. But we can also do adjustments on the policy front.
For example, we should make it easier for foreigners to participate, and that is, I think, something that should be done over the next few months because it takes a lot of time for people to get registered. If I want to trade US stock, I just have to go to one of the broker's websites, register myself, and I'm up for trading in five minutes. That ease of trading exists in that market.
For the full interview, watch the accompanying videoQ: I remember at the CNBC-TV18 forum, the Securities and Exchange Board of India (SEBI) chairman was there, and I think you and others made that point to him, that the time for registration, the time between submitting the application and being able to participate, was very long. And we got that feedback as well. But that is still an issue, that is still a niggle.
A: For example, in the Budget, we increased the limit for non-residents, which includes non-Indians, to buy up to 24%. But they still have to go through a process which makes it rather hard for them to participate easily. It's not like a decision I make today, where I want to buy Indian stocks and I'm up and ready for trading this morning. I can't take a decision at 8 o'clock in the morning to trade at 9:15 if I am sitting outside India without an approval, and that can change, and it can become a lot easier. There are concerns around round-tripping, etc., but there is room for us to make it easier.
On the debt side, there is room for us to reconsider withholding tax because debt investors don't do it. And debt investors, surprisingly, have stayed invested. They have not exited. They have been buying, and this is despite the losses they are suffering on the currency.
Q: What about taxation, equities taxation?
A: So taxation, I don't think is a burning issue in my view. The issue about taxation is the whole administrative process to file returns and to pay the tax. It's not about the tax itself. And, it reminds me of what my father told me in the 80s when I was filing my tax returns for the first time. I was still a teenager, filing my tax returns, and I was complaining to him that I now have to pay tax. So, he said, "Beta, you made money, so that is why you're paying tax. So never be unhappy about paying tax."
The fact is that a lot of foreigners who probably are not making money now are selling, and so they're not paying the tax. So, tax is not such a burning issue. The administrative process around that could be. But easier access is probably the better thing if you want to choose amongst policies, and that's the easier thing to fix. Also, capital gains tax can be a tricky thing. You can't do it retrospectively. Because if you do it, suppose hypothetically you reduce long-term capital gains tax to zero, it's going to trigger a selling avalanche because now I can take all my gains without paying tax. Who knows where the tax will be in three or four years? So, it can't be done retrospectively. It can only be done prospectively, if at all.
Catch all the latest updates from the stock market here
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