India’s P/E Valuation Story vs Regional Peers — cheaper vs its own peaks, still a premium to Asia, and what that means for flows

Executive summary
Over the last 24 months Indian equity P/E multiples have fallen from cycle peaks, bringing valuations closer to — and in some measures below — their own long-run averages. But compared with regional peers across Asia and the broader MSCI Emerging Markets index, India still trades at a meaningful premium. That dual reality — cheaper vs. recent froth but pricier vs. regional alternatives — helps explain why foreign flows in 2025 turned net negative even as some active managers and long-term allocators continue to prefer India for structural growth and reforms. This piece unpacks the drivers of valuation shifts, shows how flows have reacted, and sets out implications for investors and policymakers.

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1) What happened to Indian P/Es? A short chronology

• Peak to reset (2023–24 → 2025): Indian large-cap indices hit elevated multiples during and after the pandemic recovery as earnings growth and investor enthusiasm outpaced supply. By late-2024 and into 2025 those multiples reached historic relative highs versus other emerging markets. Over 2025, headline P/Es retreated as performance cooled and earnings catch-up and monetary/flow dynamics played out.
• Where valuations sit now (end-2025 / start-2026): Broad measures (Nifty/Sensex/INDA proxy P/Es) in late-Dec 2025 — early-Jan 2026 are lower than the immediate prior peak and near long-run average bands, but still above the averages for many Asian peers and the broader MSCI Emerging Markets index. Published market trackers show India’s market P/E in the mid-20s as of Jan 2, 2026.

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2) Why India still commands a premium to regional peers

Three structural reasons explain the persistent premium:

1. Higher expected earnings growth: India’s nominal GDP growth and corporate earnings growth have outpaced many peers over the past decade, supporting a willingness to pay more today for future profits. Fund houses and strategists repeatedly cite India’s growth premium as justification for higher multiples.
2. Index composition & sector mix: India’s indices are overweight financials, consumer and domestic-oriented businesses that command higher valuations in certain cycles; by contrast, many Asian peers have heavier commodity, export or cyclical exposure that lowers average P/Es. Changes in sector weights over time make cross-period comparisons harder but reinforce India’s premium today.
3. Market structure & investor base: A growing domestic mutual fund and retail investor base, plus concentrated interest from large global active managers, means demand dynamics differ from those of many EM peers — supporting valuation differentials.

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3) How flows reacted in 2025 — the data

• Foreign portfolio investors (FPIs): 2025 saw meaningful FPI net selling in equities — several sources report one of the largest annual net withdrawals by FIIs in recent memory (calendar-year 2025 net FPI equity outflows running into hundreds of billions of rupees). Official tallies and weekly flow trackers show sustained selling pressure during much of 2025.
• Domestic offset: Domestic mutual funds and household savings have partially offset FPI exits by increasing allocations to domestic equities, but domestic flows are not a perfect substitute for strategic foreign allocations (currency, mandate, index flows differ). The net result: markets felt the re-rating pressure despite domestic support.

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4) Mechanisms linking P/E premium and capital flows

• Relative value re-allocation: Global allocators compare expected returns (earnings growth, dividends, currency prospects) across EMs. When India's premium widens, some managers shift into cheaper Asian markets (Korea, Taiwan, parts of ASEAN), leading to FPI outflows from India. The 2025 episode reflected that mechanical reallocation as the valuation gap narrowed due to India underperformance.
• Index and ETF flows: India’s weight in EM indices and the popularity of passive products create momentum effects — when India underperforms or when allocations are trimmed, passive outflows can be sizable. Conversely, any index inclusion changes or re-ratings trigger inflows.
• Sentiment & liquidity sensitivity: Higher P/Es make markets more sensitive to macro, rate and liquidity shifts. In 2025, global risk appetite and higher-duration concerns contributed to sharper re-ratings than earnings alone would warrant.

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5) What this implies going forward — three scenarios for flows & valuations

Base case — consolidation then selective return: Valuations remain below peak, earnings growth steadies, and investors gradually re-enter selectively (quality growth, domestic franchises). FPIs may resume modest inflows once clear macro/earnings momentum is visible. This is consistent with the mid-20s P/E band and slower but steady domestic support.

Bull case — re-rating if growth surprises or policy changes: If corporate earnings accelerate, or credible policy moves (tax/structural reforms, easier cost of capital) materially improve ROE prospects, the premium could re-expand and attract fresh global allocations. Active managers who underweighted India would chase the rebound, producing strong inflows.

Bear case — continuing outflows if relative value widens: If regional peers deliver superior returns or India’s growth disappoints (or geopolitical/FX risks rise), the premium can compress further via prolonged FPI outflows and pressure on multiples. 2025’s net FPI selling is a reminder that premium positions can be vulnerable to reversals.

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6) Practical takeaways for different investor types

• Long-term allocators (pension, sovereign): Focus on structural growth, corporate governance and real returns in rupee terms. Premiums are not permanent but may be justified by multi-year earnings growth—keep allocation in line with strategic benchmarks and re-balance on valuation windows.
• Active global managers: Use the recent compression as an opportunity to buy idiosyncratic, high-quality names at more attractive entry multiples; avoid blanket views based solely on headline P/E. Sector selection matters.
• Retail/domestic investors: Domestic flows helped absorb much of the FPI selling in 2025. Stick to diversified, long-horizon plans; consider systematic entry (SIPs) to smooth timing risk.

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7) Risks to watch

• Earnings disappointment: A growth shock or profit margin compression would hit a high-P/E market disproportionately.
• External shocks / USD strength: A global risk-off or US rate surprises can trigger FPI exits from riskier assets, including India.
• Policy missteps or disappointing reforms: Market expectations priced in a degree of policy continuity; any negative surprise could affect the premium.

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Conclusion

India’s valuation story is a two-sided one: the market has become cheaper relative to the frothy peaks of 2023–24, but remains priced above many Asian peers because investors still pay for superior growth prospects, favorable index composition and a supportive domestic investor base. That combination explains why 2025 saw significant foreign selling even as structural interest in India remains strong. For flows to sustainably swing back to large net inflows, investors will seek either visible earnings upgrades, policy clarity or an attractive relative value case versus other Asian markets.