Will lower tariffs lure back FPIs from other emerging markets?

The global investment landscape is bracing for disruption as the Trump administration rolls out sweeping reciprocal tariffs on nearly all countries. The baseline 10% tariff rate against all countries will go into effect on 5 April. India faces a 27% tariff (effective 9 April) lower than many Asian peers but higher than Brazil (10%) and the Philippines (17%). Will foreign portfolio investors (FPIs) weigh tariff differentials against long-term growth prospects and reassess their allocations, and will these lower tariffs alone be enough to lure back foreign capital?

A turning tide for foreign investors?

After a brutal 15-week sell-off—the longest streak of foreign outflows, Indian capital markets saw a glimmer of hope in late March as these overseas investors turned net buyers. This tentative reversal followed cumulative outflows of a staggering ₹1.45 trillion, raising hopes that the worst may be over. However, analysts remain divided on whether this marks a sustained recovery or a temporary respite.

Similar prolonged outflows were seen in July 2022 (14 weeks, ₹1.22 trillion), October 2008 (12 weeks, ₹25,260 crore), and November 2018 (12 weeks, ₹40,164 crore). Over the past 25 years, FPIs have experienced average annual net equity outflows lasting six weeks. In 90% of these periods, the Nifty index declined by an average of 8%, with corresponding net outflows averaging ₹29,500 crore. “The recent outflow streak was among the longest, driven by geopolitical factors such as China's stimulus package, escalating Russia-Ukraine tensions, and US tariff concerns,” notes Feroze Azeez, deputy CEO, Anand Rathi Wealth.

However, historical trends indicate that markets have consistently delivered strong returns following a reversal from FPI outflows to inflows. Investors entering at this turning point have historically seen an average one-year return of 25%, with positive returns in every instance, Azeez. Considering these factors, “we are expecting a strong market recovery and increased FII inflows in the coming months,” he added.

Also read Indian market may turn March’s best performer

While each of these phases eventually saw a rebound, the triggers varied—policy stability, global risk appetite, and relative valuations all played a role.

“Predicting FPI flows is tricky because they depend on multiple factors,” said Bhavesh Shah, managing director and head of investment banking at Equirus Capital. “India’s valuations are now more reasonable compared to other markets, which could attract inflows, but external risks remain.”

Deven Choksey, MD at DRChoksey FinServ, on the other hand, believes India is well-positioned to benefit from a weaker dollar and lower global interest rates. “The tariff arbitrage works in India’s favour compared to some peers, but the bigger picture includes manufacturing competitiveness and sector-specific advantages,” he said.

The tariff arbitrage game

The impact of the new tariff regime on capital flows across emerging markets is yet to be determined. Year-to-date, India has experienced the second-highest FPI net outflows of over $14 billion, among its peer group, trailing only Taiwan ($18.2 billion). This was followed by South Korea, which saw net outflows of $6 billion. In contrast, with data available for 2024, China attracted approximately $10 billion in net inflows, while Brazil recorded net inflows of around $2 billion so far this year.

“While the differential tariff rates for countries like Brazil and the Philippines could, in theory, influence short-term investment allocation, India continues to offer a compelling long-term investment story,” said Anirudh Garg, partner and fund manager at Invasset PMS. Tariff decisions are only one part of a broader investment calculus that includes market size, demographic dividends, skilled talent pools, and policy stability, he added.

Also read From drought to revival: Are QIPs paving the way for new listings?

Equirus Capital’s Shah highlights that while tariffs play a role, the in-house manufacturing cost is equally important. He believes India can capitalize on the differential tariff structure to enhance its standing. While Brazil and the Philippines remain competitive, he notes that operational scale and technological prowess will ultimately shape India’s ability to boost sales.

Choksey, on the other hand, argues that the situation cannot be generalized, as India holds a clear advantage in certain product categories. He points out that the country is relatively better off in specific manufacturing sectors, particularly pharmaceuticals and some agricultural products. “We are definitely more competitive in these areas compared to other countries.”

Valuations: A silver lining?

Despite recent outflows, India’s stock market has shown resilience. The Nifty 50’s year-to-date decline of 1.7% is modest compared to Japan’s Nikkei 225 (-12.9%), Taiwan’s Taiex (-7.5%), and the US’ S&P 500 (-3.6%). However, it lags behind Germany’s DAX (9.8%) and Hong Kong’s Hang Seng (13.9%).

From a valuation perspective, India’s one-year forward price-to-earnings (P/E) ratio of 17.3x is moderately higher than some emerging markets like Taiwan (13.1x), Indonesia (9.8x), and Brazil (6.9x), but still below the S&P 500 (18.7x). While some emerging markets appear cheaper, India’s stronger growth prospects support its relatively higher valuation. Moreover, valuations have come down significantly since the correction started in October last year. It is currently trading over 15% discount to its one-year forward P/E ratio since September, when markets peaked.

Also read FPIs continue to snub consumption, even after budget incentives

“We expect FPIs to turn more positive on India. With resilient corporate earnings, steady domestic flows, and equity valuations below historical averages, the medium- to long-term outlook for Indian equities remains favourable,” said Sujan Hajra, chief economist & executive director, Anand Rathi Group.