India traditionally carried a 20-25% risk premium versus other emerging markets. However, recently, that premium has soared to 60%, a level unjustified by the current pace of corporate earnings growth, Sunil Tirumalai, head of Emerging Markets and Asia Equity Strategy at UBS Securities, said during a virtual media briefing on Tuesday.
Indian equities often carry a high risk premium, driven by their long-term growth story and the appeal of a young, consumption-led economy. But alongside this optimism come challenges like policy uncertainty, market volatility and currency risks that make investors demand extra returns. The premium reflects both optimism about India’s future and the risks tied to it.
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In late April, UBS Securities tactically changed their equity strategy for emerging markets to domestic and defensive-oriented sectors in view of global trade tensions, while upgrading stance on India to neutral from underweight.
However, a stronger case to invest in India will likely emerge when corporate earnings growth picks up, manufacturing gains traction and US-India trade negotiations reach a breakthrough, Tirumalai said during the briefing ahead of the UBS Asian Investment Conference in Hong Kong.
From September 2024 to May 2025, the Nifty 50 and the Nifty Midcap 150 indices went through a full peak-to-trough-to-rebound cycle—correcting 16% and 21%, then recovering 13–17% from their February and March 2025 lows, respectively, highlighted a 22 May report by Elara Capital. Yet, the market that has emerged looking fundamentally different, it read.
“The drawdowns were valuation-led and broad-based; the rebound has been rotational, earnings-supported on a selective basis, and anchored in lower-multiple segments.”
Meanwhile, even foreign inflows into India seem to be back as India is seen as a relative safe haven.
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“FIIs turned positive on most of the emerging markets as news flow on trade and tariffs improved,” said a report by BNP Paribas dated 14 May. Markets have reacted positively to the tariff pause, US-UK trade deal and rollback of recent tariffs between the US and China, the report said.
Analysts suggested that a clearer global tariff outlook was essential for the return of FII flows. Over the past month, many believe that uncertainty surrounding tariffs has eased.
As a result, Foreign Institutional Investors (FIIs) have purchased Indian equities worth $6.1 billion over the 16 trading sessions leading up to 8 May. According to a report by BNP Paribas, FII ownership in Indian markets, which had been on a downward trend for several years, has stabilized since February 2025.
Net FPI investments in Indian equities turned positive in April, with inflows of ₹4,223 crore, following three straight months of outflows— ₹78,027 crore in January, ₹34,574 crore in February, and ₹3,973 crore in March. So far in May (up to the 26 May), FPIs have made net purchases totaling ₹14,429 crore, according to data from NSDL.
Tirumalai said that when the dollar softens, emerging markets usually gain, adding that he expects the greenback to stay weak through the rest of 2025.
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A weak dollar makes emerging market assets like Indian equities more attractive to foreign investors, as their returns improve in dollar terms. It also eases funding conditions globally, encouraging capital flows into higher-yielding markets.
In 2025 so far, MSCI EM has gained nearly 9% while MSCI India is up 3.4%.
UBS Securities continues to favour China for now, citing its attractive valuations and comparatively stronger fundamentals.
Meanwhile, J.P. Morgan noted that Chinese equities have recovered most of the losses since US President Donald Trump’s 2 April “Liberation Day” tariffs announced to curb imports, like the rest of the world, but have lagged the performance of the EM benchmark, as well as the developed market benchmark. Within the emerging market pack, Chinese equities were the worst hit in the post-Liberation Day sharp de-risking, down 13% in less than a week, the 19 May report highlighted.
“We recognize that 90 days may not be enough for the US and China to deliver a trade agreement, and the tariffs noise is unlikely to go away, but we do not expect the US to again adopt an aggressive trade stance towards China, which could allow EM equities to trade better,” said J.P. Morgan analysts in their equity strategy report, while upgrading their stance on emerging markets to neutral from underweight.
