After nearly a year of continuous capital outflows, India's foreign portfolio investment landscape appears set for a significant turnaround. According to a comprehensive analysis by Elara Capital, the country could witness a revival in foreign investments as early as the first quarter of 2026, driven primarily by accelerating nominal GDP growth.
The GDP-FPI Connection: A 15-Year Pattern
Elara Capital's research, which tracks foreign portfolio investor trends over the past 15 years, reveals a compelling pattern: nominal GDP growth serves as the crucial determinant for foreign investment cycles. The brokerage firm's analysis shows that five distinct peak-to-trough FPI cycles since 2010 align remarkably well with India's nominal GDP cycles.
The peaks and troughs of FPI cycles consistently correlate with similar patterns in nominal GDP growth, establishing a clear relationship that has guided investment flows for over a decade. This historical pattern provides strong indicators for future investment trends.
Current Challenges and Future Projections
The recent outflow of foreign portfolio investments has been attributed to multiple factors, including the absence of dedicated artificial intelligence opportunities in India and escalating geopolitical tensions worldwide. Since 2024, sluggish economic growth has been the primary driver behind FPI outflows, though some support has come from the weakening US Dollar Index (DXY).
Elara Capital projects a significant improvement in India's growth trajectory. Nominal GDP growth is expected to recover to 10% in FY27, up from approximately 8% projected for FY26. While real GDP is anticipated to remain steady at 7% for both years, the acceleration in nominal growth should trigger renewed foreign investor interest.
Multiple Growth Drivers Converging
Several positive developments are creating a favorable environment for foreign investment recovery. India's policy framework has become increasingly growth-oriented, with supportive fiscal measures including potential reductions in personal income tax and GST reforms. The intertemporal effects of pent-up demand following GST reductions are showing early positive signs, with consumers beginning to increase spending during the seasonally robust third quarter.
Public capital expenditure has gained substantial momentum at both central and state government levels, generating sustainable growth impulses throughout the economy. Private Final Consumption Expenditure, which constitutes 55-60% of GDP, shows promising recovery signals.
International Factors Supporting Recovery
On the global front, encouraging developments include progress toward a potential India-US trade agreement in 2025. Elara Capital expects the retraction of the 25% tariff related to Russian oil imports, which could significantly reduce the policy-implied effective tariff rate on India from the current 32-33% to 17-18%.
The global monetary environment is also turning favorable. The Federal Reserve has resumed its rate-cutting cycle, with two-year yields falling approximately 82 basis points and 10-year yields decreasing around 70 basis points from their year-to-date highs. The US Dollar Index remains stable within the 95-100 range, having experienced an 8.5-9% decline this year.
Improving Corporate Earnings Outlook
The second quarter of FY26 marks the beginning of a new earnings upcycle, with Profit After Tax anticipated to increase by 12.5% year-over-year. This represents the first instance of double-digit growth in six quarters, signaling a positive shift in corporate performance.
While FY26 earnings growth remains concentrated in commodity-driven sectors, Elara Capital predicts more widespread growth across sectors in FY27 as consumption and industrial recovery gain momentum. Among the 179 companies covered by Elara that have reported results, there has been an 8% year-over-year increase in sales, a 15% rise in EBITDA, and a 16% increase in PAT.
With approximately 30% of results still outstanding as of November 13, the brokerage expects these positive trends to continue throughout the result cycle. Their assessment shows 73 out of 179 stocks have exceeded expectations, while only 39 have fallen below estimates - indicating roughly two positive surprises for every disappointment.
Domestically, benign inflation and stable nominal growth have created sufficient policy space for the Reserve Bank of India's Monetary Policy Committee to undertake 50 basis points of rate cuts during the next two meetings in FY26. This accommodative monetary stance, combined with improving fundamentals, sets the stage for a robust FPI recovery by 2026.
