Budgeting in Asia: FIIs Rotate Capital from India to Taiwan, South Korea & China

SYNOPSIS

Foreign institutional investors (FIIs) are rotating capital away from India, citing high valuations and weaker earnings momentum, and directing flows toward Taiwan, South Korea, and China. Semiconductors, AI-driven demand, and regulatory easing are fueling these markets, while India faces trade frictions and policy bottlenecks. India’s long-term story remains strong, but consistent earnings and reforms are needed to restore its appeal.

Foreign institutional investors shift funds from India to Taiwan, South Korea, and China due to semiconductor demand and regulatory changes, as India faces trade and policy challenges.

In 2025, there has been a marked change in emerging-market allocations by foreign institutional investors (FIIs). India, the golden child of Emerging Market funds, is now being pared as investors look for less expensive valuations, stronger profit movement, or friendlier regulatory or macro environments. As a result, Taiwan, South Korea, and China are increasingly getting money thrown at them.

What the Data Tells Us

However, as of August, FIIs have sold off a net US$12.8 billion from Indian equities for the year. India’s relative valuation is high: it trades at 19-20x forward P/E multiples, well above the EM average (which is ~12-13x for many peers).

In turn, Taiwan and South Korea have received huge inflows. In the course of a recent three-month period, they attracted a combined US$25.7 billion, headed by Taiwan's highest inflows in the last two decades. China is seeing improved sentiment and earnings estimate upgrades, helping it outshine India in certain metrics. Why the Shift is Happening ?

Valuation Gaps & Earnings Momentum: Under-performance of Indian earnings in USD terms has been relatively weaker vs growth in Taiwan, South Korea and China. It has also become less attractive given the tension in valuation and earnings momentum in India.

Tariffs & Trade Uncertainty: The recent US tariffs on Indian exports have made the India story more risky. Meanwhile, trade-and-tech dynamics in Taiwan & South Korea, particularly as they relate to semiconductors and AI, are falling their way.

Macro & Policy Differences: According to MSCI, while India’s strong macro fundamentals are positives, weak banking margins, credit stresses, and high valuations serve to reduce short–term gains; meanwhile, Taiwan and Korea benefit from strong global demand in both semiconductors and electronics.

Implications & What to Watch

• India: It needs fresh catalysts. Such as stronger corporate earnings, relief from trade friction, tax/regulatory reforms and clear signals from the RBI or government to justify current valuations.

• Taiwan & South Korea: May continue to benefit if global demand in semiconductors, AI hardware, etc., doesn’t falter.

• China: With earnings upgrades and potential easing in regulatory headwinds, China could draw further flows.

Conclusion

The phase of capital rotation by FIIs currently taking place is not so much a repudiation of India as it is a restoration of equilibrium in which markets with attractive valuations and visible earnings reports use semiconductors and AI chip output to drive value. When it comes to the long-term growth story, India still has an impressive record. But its high valuations and less investment-friendly policies have most recently put it at risk. Taiwan, South Korea, and China now offer an attractive risk-to-reward ratio. However, capital stays fluid in the face of continued geopolitical risks and global demand cycles. For India, the path forward lies in delivering consistent earnings growth, easing trade frictions, and aligning policy to maintain its appeal as a structural growth story in Asia.

Gautam Kumar