The world is competing for capital | The Beam: Weekly Market Narrative

Why the foreign investor has stayed away, and what would bring them back.

In the last issue of The Beam,  we wrote about the disconnect between a resilient domestic economy, rising corporate earnings and a lackluster equity market. The explanation, we argued, lies in flows and liquidity. Foreign investors have not just stayed away from India, they remain net sellers, even as the macro improves and valuations are more attractive than they were a year ago.  This market fatigue is not a referendum on corporate health; it is the direct fallout of a liquidity imbalance driven by relentless foreign portfolio outflows.

The Nominal Shift: A New Era of Global GDP and Corporate Earnings

To understand why foreign institutional investors are behaving this way, we must look at the broader canvas:   The global economy has moved into a regime of strong nominal growth that bears little resemblance to the years after the financial crisis.

Across the United States, Europe, and even Japan, nominal expansion is running stronger than anything we experienced in the sluggish post-Global Financial Crisis era leading up to the pandemic.  In the United States, nominal GDP growth is expected to surge to almost 6% YOY in 2026, while Europe and even Japan have broken free from their decades-long deflationary patterns to post much healthier nominal growth rates. This nominal expansion is acting as a massive tailwind for corporate earnings, driving corporate earnings growth at a pace unseen since the pre-GFC years. In the US, S&P 500 earnings for Q3 2026 are projected to rise by 28% YOY following a powerful Q2 performance. Full-year 2026 corporate earnings growth is forecast between 24% and 32% yoy . Europe is mirroring this strength; STOXX 600 companies are poised to deliver a bumper Q3 growth of 21% (albeit led by energy), building heavily on double-digit expansions from earlier in the year.  When we put this in context, we see that India’s 15% plus earnings growth trajectory, which excited foreign institutional investors post the Global Financial Crisis and secular stagnation, is no longer the case.    While the US’s earnings growth has been well understood, the surge in earnings in Europe is creating strong competition for India, particularly from investors looking at the all world index. 

Put into historical perspective, these aren't cyclical bounces; they are structural surges fueled by pricing power and nominal velocity that completely dwarf the low-nominal-growth decade of the 2010s.

The Capital Squeeze: Three Industrial Super-Cycles and the Death of Secular Stagnation

This global nominal acceleration is being propelled by a simultaneous interplay of three massive, capital-intensive industrial cycles that have only begun: aggressive AI infrastructure deployment, renewable energy transition, and a synchronized global defense upcycle. For over a decade following the financial crisis, the global economy suffered from "secular stagnation” an era defined by chronic over-capacity, anemic demand, excess savings, and a desperate search for yield where capital was treated as a near-free, infinite utility. Those days are gone. The sheer scale of capital required to fund these three concurrent capital-intensive cycles has upended financial markets. Today, governments and the private sector—particularly in the U.S.—are locked in fierce competition for the exact same pool of finite savings. For emerging markets that have historically relied on foreign capital surpluses to fund domestic growth, this structural shift means higher global interest rates and brutal competition for every dollar of cross-border capital.

Nominal GDP growth Outperformance is No Longer Enough in a Capital-Starved World

This brings us to the heart of the Indian disconnect, we spoke about in the last issue of The Beam. Up until now and for almost twenty years foreign investors invested under the assumption that India’s structural alpha—anchored around a 10% to 12% nominal GDP growth rate—made it an automatic destination for global capital. In a world where global nominal growth was anemic, India stood out like an oasis. India’s nominal GDP gap with the world has narrowed in current environment of strong global nominal growth led by deglobalization, mercantilism and of course the historic AI infrastructure and renewable energy transition cycles. Today, we operate in a fundamentally capital-starved world where the US Treasury and hyperscalers are aggressively crowding out the rest of the world.  Capital has become scarce and competed for, aggressively.  In this hyper-competitive regime, India’s stellar macros, robust high-frequency indicators, and an otherwise enviable 15% plus corporate earnings growth trajectory are attractive but not attractive enough, in isolation. 

The current global environment demands that we create a more conducive environment for foreign capital by deliberately and consciously engineering a competitive advantage and proactive, pragmatic policy incentives that compels global asset allocators to invest in India.

Rationalizing long term capital gains taxation for FII’s would be the  right solution at the right time

While there could be many policy initiatives, addressing friction points like Capital Gains Tax (LTCG) rationalization for Foreign Institutional Investors (FIIs) would send a powerful, welcoming signal to global allocators. It is the right sweetener, delivered at precisely the right macro turning point, to bridge the disconnect and pull foreign capital back home.  This isn't about appeasement; it is about conscious legitimate economic signaling in a world that is competing for a finite pool of liquidity. Implementing this adjustment now creates the ultimate macroeconomic sweetener. By aligning a significant fiscal incentive exactly when India’s structural GDP growth and corporate earnings are turning robust, we transform a cyclical market disconnect into a potent long-term entry point for global capital with multi layered benefits for equity markets, currency markets and the broader economy.

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