Easing PMS rules may not immediately boost NRI inflows; global returns, currency key factors, says expert

Recent easing of portfolio management services (PMS) rules is expected to open the door for higher foreign participation in Indian equities, but it may not automatically translate into steady inflows from non-resident Indians (NRIs), according to Karan Aggarwal, Co-founder and CIO of Ametra PMS, a SEBI-registered portfolio manager.

Aggarwal said the regulatory changes are a positive step as they allow foreign individual investors to take exposure to Indian equities without relying on complex institutional routes such as foreign institutional investor (FII) or foreign direct investment (FDI) structures.

“These changes unlock foreign capital which was earlier unavailable to Indian markets. Foreign individuals can now build meaningful positions in Indian companies, which is particularly positive for segments outside the top 500 market capitalisation,” he said.

However, he cautioned that easing rules alone may not ensure sustained inflows, as NRI investment behaviour is influenced by global market performance, currency movements and regional investment preferences.

Global comparison drives NRI decisions

According to Aggarwal, NRIs based in the US, Europe and Southeast Asia tend to follow a growth-oriented approach, but their allocation decisions depend heavily on how India performs relative to other global markets.

Over the past year, Indian equities have lagged major global benchmarks in dollar terms. He noted that returns of about 2% in USD terms compared with around 14% for the S&P 500 and nearly 30% for the MSCI Emerging Markets Index can affect investor confidence if the trend continues over the next one to two years.

“These investors compare India with global opportunities. If relative performance remains weak, allocations may not rise despite regulatory easing,” Aggarwal said.

He added that overseas investors are also sensitive to currency movements, as depreciation of the rupee reduces effective returns.

Investment behaviour varies by region

Aggarwal said NRI investment patterns differ significantly depending on where investors are based.

Gulf-based NRIs typically prefer stable, income-generating assets and often invest in real estate-linked structures, REITs and alternative investment funds (AIFs). These investments are designed to generate regular post-tax income and help offset inflation and currency depreciation, which aligns with the investment culture in GCC countries.

“In the Gulf, investors look for steady income and capital protection, so a large part of India exposure comes through REITs, AIFs and structured products that are less volatile,” he said.

In contrast, NRIs living in the US, Europe and Southeast Asia are more comfortable with equity risk but evaluate India against other global markets before committing capital.

Aggarwal noted that many overseas investors have exposure to markets such as China, where economic growth did not always translate into strong stock market returns, making them cautious about valuations and earnings alignment in India.

Why overseas investors reduce exposure during downturns

Global investors also tend to reduce allocations to India during periods of underperformance because they have easy access to large developed markets, particularly the United States.

Aggarwal said the S&P 500 has delivered roughly 450% returns over the past 15 years in dollar terms, compared with about 90% for India, which explains why global investors often remain underweight on Indian equities.

Currency depreciation further reduces effective returns for overseas investors. He estimated that rupee weakness has eroded nearly half of NRI returns over the past decade and a half.

He added that valuation concerns also play a role, as India is currently among the most expensive markets outside the US, while regions such as Europe, Japan, China, South Korea and Taiwan offer relatively lower valuations.

The recent global focus on artificial intelligence has also shifted investor interest toward East Asian markets that are deeply integrated into the AI supply chain, making it harder for India to attract incremental foreign capital in the short term.