$320 Billion Danger: Why 70 Emerging Market Funds Remain Underweight on India

Despite India’s strong economic growth and improving corporate earnings outlook, a significant number of major emerging market (EM) funds remain cautious about India. Global brokerage firm Jefferies has recently highlighted that 70 large EM funds, managing a combined asset pool of around $320 billion as of March 2026, continue to be underweight on India compared to their benchmark allocations.

According to Jefferies, about 61% of these EM funds are underweight India, with an average positioning roughly 0.4 percentage points below the MSCI Emerging Markets benchmark. This consensus underweight stance comes even though Foreign Institutional Investors (FIIs) have pulled billions out of Indian equities since September 2024, marking one of the sharpest sell-offs in recent years.

The key reasons driving this cautious approach boil down primarily to valuation concerns and near-term earnings uncertainty. India’s stock market currently trades at a forward price-to-earnings (P/E) ratio of approximately 19.8 times, which represents a hefty 70% premium over other emerging market peers. This rich valuation relative to expected earnings growth has made many investors wary of increasing exposure to Indian equities.

Emerging market funds are weighing the high valuations against growth prospects, and many feel that the current premium may not be justified, especially given more volatile global economic conditions and geopolitical uncertainties. Additionally, currency fluctuations and external market cues continue to make fund managers tread carefully.

Moreover, this underweight positioning is not likely to change quickly. Jefferies notes that globally, India is seen as a consensus underweight market among foreign portfolio investors (FPIs) and that the sentiment is unlikely to shift in the near term. Fund managers appear to be balancing India’s positive long-term fundamentals with the risks posed by stretched valuations and evolving market dynamics.

For investors and market watchers, this scenario suggests a dual narrative. On one hand, India’s growth story remains robust, supported by solid earnings growth, reforms, and consumption trends. On the other, the potential liquidity risks from large EM funds staying underweight—and possibly continuing to reduce allocations—could add to market volatility.

In essence, the $320 billion danger flagged by Jefferies is about the latent risk of large-scale capital shifts driven by fund managers’ cautious stance. If a substantial portion of these EM funds decide to further cut India exposure in response to valuation and macro concerns, it could exacerbate market swings.

For now, investors need to watch global cues closely alongside sector-specific developments within India. The juxtaposition of strong fundamentals and valuation risks calls for a nuanced view — not just on India’s market but within the broader emerging market universe.

In conclusion, while India’s economic prospects remain attractive, the persistent underweight positioning by major emerging market funds signals ongoing caution fueled by valuation premiums and short-term market uncertainties. Understanding this dynamic is crucial for anyone tracking India’s capital market flows and gauging future investment trends.

This makes India’s market a fascinating space where opportunity and risk coexist, especially highlighted by the current $320 billion underweight allocation by major EM players.