India’s headline economic numbers have dazzled — real GDP expanded at a brisk clip in the April–June quarter, and policymakers are pointing to domestic demand and reform momentum as reasons for optimism. Yet equity investors, especially foreign portfolio managers, have increasingly turned cautious. The disconnect between heavy macro growth and tepid market appetite reflects a mix of weaker nominal expansion, sliding corporate revenue momentum, rising trade-policy risk, currency volatility and concern about the credit cycle — a combination that has left many funds reluctant to increase India exposure even as growth prints remain robust.

Domestic growth versus investor math

On paper, India’s economy is growing faster than most peers: the recent quarter showed a strong rise in real output and government figures point to healthy activity across services and rural consumption. But investors look beyond real GDP: nominal GDP — which captures the price effects that feed into corporate top lines — has slowed sharply, reducing expectations for revenue and profit growth. As a result, headline economic momentum has not yet translated into the kind of earnings upgrades or market returns that attract foreign capital.

Public and private-sector reports show corporate revenue growth among India’s largest listed firms has slipped to multi-quarter lows, narrowing the gap between economic growth and corporate performance. That erosion in pricing power matters to global funds that model returns off nominal sales trajectories and margins: when revenues cool, valuations that once felt supported by rapid topline growth begin to look vulnerable.

Tariffs, trade shock and the foreign investor calculus

A new layer of uncertainty has arrived from trade policy. The sudden imposition of steep U.S. tariffs on a wide swathe of Indian exports has raised the spectre of a meaningful hit to exporters’ margins, potential job losses in labour-intensive sectors, and deferred investment plans. For offshore investors whose allocations are sensitive to export cycles and supply-chain rules, the tariffs have the immediate effect of increasing downside risk.

Investors are also watching the ripple effects. A hit to export revenues weighs on corporate balance sheets and can slow the pace of credit growth; a weaker nominal growth outlook, in turn, reduces the scope for substantial earnings upgrades. Against that backdrop, many foreign managers have shifted to a defensive stance — pruning cyclical exposures, favouring domestically focused names with stable cash flows, and waiting for clearer signs that tariffs will be temporary or meaningfully mitigated by policy responses.

Another key worry for investors is the health of credit expansion and the banking system’s ability to support a sustained investment cycle. Recent central bank data show credit growth has moderated from the double-digit pace of prior years. Slower credit creation for industry and capex-sensitive sectors reduces the odds of a fast private-investment upswing and raises the risk that the economy’s current expansion is driven more by government spending and consumption than by broad-based corporate investment.

Banking-sector watchers also flag the potential for asset-quality strains if export-linked firms and tariffs depress cash flow. That, coupled with a cautious lending stance from some banks, feeds into investor skepticism: market participants fear that an economy with a slower nominal trajectory and weaker credit momentum could leave corporate earnings vulnerable to downgrades, which are among the fastest ways to unsettle equity markets.

Currency swings, repatriation risk and portfolio flows

Exchange-rate moves have amplified investor jitters. The rupee’s renewed weakness versus the dollar raises concerns about repatriation losses for foreign investors and the rising cost of dollar-denominated inputs for Indian corporates. Volatility in the currency — punctuated by sharp daily moves — acts as an added tax on returns and nudges some active managers to reduce net exposure rather than risk a currency shock compounding local equity volatility.

The flow picture has been striking: foreign portfolio investors have pulled substantial sums from Indian equities already this year, and monthly outflows spiked in August amid the tariff headlines. For many global funds, a sequence of outflows followed by currency depreciation and earnings uncertainty makes India a less attractive near-term allocation despite its strong growth numbers.

Valuations, position sizing and the hunt for entry points

Part of the caution also reflects valuation and position-sizing discipline. Indian equities have traded at a premium to many emerging-market peers for years; while recent underperformance has trimmed that gap, managers remain wary of paying up for markets where earnings momentum is fading. Some asset managers view the current lull as an “attractive entry point” for patient investors, but the consensus is that more evidence of durable corporate recovery — not just headline GDP — is needed to spark broad-based buying.

In practice, this has led to a bifurcation in investor behaviour: active managers with a longer horizon are selectively increasing stakes in high-conviction domestic plays (banks, infrastructure, consumer discretionary names tied to Indian consumption), while systematic funds and tactical allocators have reduced weighting until more clarity emerges on tariffs, credit trends and currency stability.

Indian policymakers are acutely aware of the dilemma: robust real growth that does not immediately lift earnings or market confidence is politically and economically uncomfortable. The government and regulators have floated a mix of measures — from tax incentives and targeted consumption support to reforms aimed at boosting investment. There is also industry chatter that tax changes and a possible GST revision could stimulate durable consumption, narrowing the gap between GDP and corporate sales.

For global investors, the key signals they want to see are concrete and measurable: sustained upticks in nominal GDP and corporate revenue growth, stabilisation of credit flows into industry and capex, a clear path on trade frictions or compensatory market access, and lower currency volatility. Until then, many remain defensive, balancing the appeal of India’s long-term fundamentals against the near-term risks that can quickly erode returns.

What firms and fund managers are doing now

Portfolio managers are responding with playbooks to manage the uncertainty: hedging currency exposure, shortening trade and inventory cycles for export-exposed companies, and reweighting portfolios toward businesses whose revenues are tied to the domestic economy rather than external demand. Some global funds are also using the current weakness to add selectively to high-quality names at lower prices, but most are keeping overall allocations below target until earnings momentum becomes clearer.

For India’s equity market to convincingly turn the page, the narrative needs to shift from “growth on paper” to “growth in cash flows.” That requires improved nominal dynamics, a recovery in corporate revenues, and tangible policy steps that mitigate the tariff shock — milestones that will determine whether foreign investors return with conviction or remain cautiously on the sidelines.

(Adapted from Reuters.com)

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