FII outflows not driven by lack of AI and high taxes, says Shankar Sharma. Here’s why

At a time when market commentary is increasingly driven by quick takes and convenient explanations, veteran investor Shankar Sharma, who founded First Global, a notable financial services company, in 1994, and later ventured into GQuant Investech in 2015, offers a sharp pushback, rooted not in opinion, but in data.

His central argument is straightforward: popular narratives around why foreign investors are avoiding India, be it the lack of AI exposure or tax concerns, do not stand up.

One of the dominant claims doing the rounds is that foreign investors are favouring markets with strong AI exposure, leaving India behind. But a look at global market performance tells a very different story.

As per the data, several markets with little to no AI ecosystem have significantly outperformed. South Korea’s KOSPI Index has delivered a staggering 149.6% one-year return, while Taiwan’s TAIEX Index is up 96.6%. Even markets like Vietnam (74%), Brazil (59.1%), Japan (49.9%), and Pakistan (47.7%) have posted strong gains.

In contrast, the US, widely seen as the epicentre of AI, does not dominate the rankings. The NASDAQ 100 shows a 40.3% one-year return, while the S&P 500 stands at 29.4%, placing it well below several non-AI-heavy markets.

The takeaway is clear: market performance is not exclusively tied to AI exposure. India’s underperformance, as shown in the same dataset, is stark. The Nifty 50 has declined 12.1% over one year, while the Sensex is down 14.5%. Even the broader Nifty 500 has fallen 8.2%.But Sharma points out a critical inconsistency in the prevailing narrative. India has never been a tech-heavy market, and yet it delivered strong returns over the past two decades. If tech was not the driver then, it is difficult to argue that its absence is the reason now.

Another widely cited explanation is that taxation has driven foreign investors away. Here again, Sharma turns to data.

The correlation between net FII investment and Sensex returns stands at just 0.15 since 1999, indicating a weak relationship.

More importantly, the data shows that markets have risen and fallen across periods of both strong inflows and significant outflows. For instance, despite large negative FII flows in certain years, market returns have still been positive, and vice versa. Over the last 10 years, even with cumulative FII outflows of Rs -2,93,317 crore, the market has delivered a 226% return.

The implication is clear: FII flows and taxation alone do not explain market direction.

Markets across the world have delivered strong returns irrespective of AI exposure. India’s own historical performance contradicts the idea that tech is a prerequisite for success. And the relationship between FII flows and market returns remains weak at best, he said on microblogging site X, formerly Twitter.

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