Despite optimism stemming from easing Middle East tensions, any rebound in Indian equities is likely to be short-lived, as foreign investors continue to reduce their holdings in the market.

Buoyed by a global stock rally, India’s major stock indices posted their strongest gains since May 2025 on Wednesday. However, preliminary exchange data show that overseas investors remain net sellers of domestic equities, extending their selling streak to a record length. In contrast, foreign investors have been net buyers in markets such as South Korea.

Concerns over slowing corporate earnings growth in India continue to cloud the market’s outlook. The current valuation of Indian stocks, exceeding 18 times forward price-to-earnings, lacks fundamental support. Jefferies estimates that, excluding commodity-related firms, corporate profit growth in India stands at only 10%.

The software services sector, a key contributor to index profits, is facing net losses as companies increasingly adopt AI-driven solutions. Meanwhile, Indian banks are exposed to potential losses from foreign exchange bets, and the consumer sector is expected to bear the brunt of energy shocks resulting from U.S.-Iran tensions.

Although the Indian economy is projected to grow by 6.9% this fiscal year, outperforming most major economies, investors worry that corporate profits may not double in sync. Against this backdrop, foreign investors are likely to continue using every market rebound as an opportunity to reduce exposure.