The robust foreign fund flows into India over the last 10 years has not been without reason. Thanks to India’s strong economic fundamentals, 34 per cent of the listed companies in the country have delivered a Return on Equity of 14 per cent in the last 10 years.

Interestingly, India second only to the US in this respect, where 39 per cent of companies have generated return on equity of 15 per cent in the same period.

In the last 10 years, only 20 per cent of listed companies in China and Mexico have delivered 12 per cent and 13 per cent return on equity, while it was 12 per cent in Brazil, according to Netra, the recent monthly report of DSP Mutual Fund.

India’s ROE adjusted for cost of equity in last decade was 6 per cent, while that in the US and Mexico was at 7 per cent and 4 per cent, respectively. The same for China and other emerging markets stood at -2.5 per cent and -12 per cent.

The extra return that stocks can provide stems from the management’s ability to generate returns in excess of their cost of capital. Therefore, the primary driver of stock prices over the long term is the returns that shareholders earn on their capital.

Companies with superior ROE are more likely to deliver higher returns compared to their peers.

The strong ROE performance is the true engine behind India’s superior stock market results, suggesting that the underlying fundamentals are what truly matter, rather than the popular narratives surrounding market performance, said the report.

The cumulative foreign portfolio investor flows into India have more than doubled to ₹16.17 lakh crore in the last fiscal, against ₹7.89 lakh crore in FY’14.

In fact, the inflows into equity zoomed to ₹2.08 lakh crore last fiscal, against ₹79,709 crore in FY’24.

Though geopolitical development and slowing domestic demand have resulted in FPIs pulling out ₹3,148 crore so far this fiscal, market veterans are confident that foreign investors will return to India sooner than later.

Subhash C Aggarwal, CMD, SMC Global Securities, said rising urban consumption, young demographics, service sector growth and infrastructural push will be the major growth factors for the Indian economy next year.

Foreign investors who are pulling out funds from India are expected to take a U-turn in 2025. The recovery of the company’s earnings, better liquidity, strong domestic demand, control of fiscal deficit and robust government policies will make foreign investors return to Indian stock market, he added.

Besides expectations of a recovery in corporate earnings in the second half of this fiscal, enhanced retail investor participation through mutual funds, revival of the government’s infrastructure spending and an expected rate cut by the RBI are expected to propel growth in the coming year.