India’s Finance Minister blames easy exits and excess liquidity for equity market’s underperformance

Excess liquidity in India’s equity market has contributed to underperformance and may continue to do so, according to Finance Minister Nirmala Sitharaman.

“Because of the ease of liquidity, ease of availability, people are even exiting easily” from equities, Sitharaman told CNBC in an exclusive interview on the sidelines of the IMF-World Bank meetings in Bangkok on Friday. However, the fundamentals of the Indian economy are “fine,” she said.

Since January, India’s key benchmark indexes have slipped nearly 12%, as per LSEG data, even though the country’s economic growth has been resilient amid trade uncertainty and geopolitical shocks. India has been hit with record outflows by foreign investors from its equity markets, and Sitharaman said that continued capital outflows are one of the biggest risks for India in 2027.

Still, domestic capital continues to flood the market. Indian equity mutual funds have recorded net inflows every month since March 2021, according to data released by industry body Association of Mutual Funds in India earlier this month.

Multinational companies, private equity funds and foreign investors have been able to make partial or full exits from their investments at a premium. Between 2021 and 2025, Indian initial public offerings collectively raised $60.4 billion, of which “a staggering” $37.7 billion, or 63% of total proceeds, went to existing holders who sold their shares to the public, an EY report in August said.

Foreign portfolio investors have sold direct Indian equities of over $33 billion so far this year, as per Indian depository firm NSDL. India has gained a reputation as an anti-artificial intelligence trade, while markets like Taiwan and Korea, with AI champions, have attracted strong investment flows.

The flight of capital toward AI and the U.S., which otherwise moves toward different countries for different sectoral investments, is “a concern,” she added.

Taiwan now has the largest market weighting in the MSCI Asia Pacific ex-Japan index at 29%, while Korea has moved into second place at 22%, as per a report by Goldman Sachs on Oct. 8. India’s share has compressed from 19% a few years ago to 10%, it added.

But with the global AI rally showing cracks, Sitharaman said India wouldn’t be “hurt” from any spillover if the bubble burst. India has not received the “AI kind of investments coming into different jurisdictions,” she said.

Sitharaman, who is India’s longest-serving finance minister to hold the office continuously, added that the South Asian country was “no longer a laggard” in the frontier tech space and investment was being made to set up semiconductor manufacturing.