Flawed to say domestic flows alone inflate India's valuations

The domestic markets have traded at a premium to emerging market (EM) peers long before the domestic investment boom, says Ridham Desai, managing director and chief India equity strategist, Morgan Stanley India. In an interview with Samie Modak and Sundar Sethuraman in Mumbai ahead of Morgan Stanley's annual India Investment Forum, Desai said sustained foreign portfolio investor (FPI) flows will depend on India maintaining its appeal as a stable and high-return market. Edited excerpts:

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What has driven the Indian stock market's sharp rebound from the April lows?

The market's recovery can be assigned to three factors. First, the Reserve Bank of India (RBI) pivoted its monetary policy in February 2025, offsetting the government's sharp fiscal consolidation, which had slowed the economy. Second, stocks—particularly in the broader market—became attractively priced, triggering sizeable domestic buying in February and March, even as foreign investors sold off. Third, India's relative stability in a world shaken by US policy changes, such as tariffs, made it a standout.

Why have FPI flows remained soft?

India's market is now heavily driven by domestic investors, a trend that began in 2015 and could last for decades. Domestic investors, including institutions and retail, are secular buyers. This leaves little room for foreign investors to buy unless they bid up prices, which we've seen when foreign buying pushes the market higher.