Will FIIs dump India as China regains trade edge after US truce?

Just when the bulls were getting comfortable on Dalal Street, the dragon may be gearing up to breathe some fire. With nearly $2 billion of foreign institutional inflows flooding Indian equities since April, a fresh US-China tariff truce could flip the script. The specter of global peace in trade—once a balm for battered investors—might now drive them away from the safety of Indian shores and back into the arms of a newly seductive China.

“The China-US deal may reduce the relative attractiveness of India,” analysts at CLSA warned, calling out the elephant in the room. “It may dial back fears of a global trade war. A rise in these fears made India a hiding place and the second-best performing market since March.”

While the news flows might point to a temporary reshuffling of capital, not everyone is buying the China comeback story. Dr. Vikas Gupta, CEO of OmniScience Capital and Smallcase manager, offers a sharp counter. “The Chinese markets have not given any long-term returns to investors. For example, the MSCI China ETF (MCHI) is nearly flat from 2011 to today, despite massive GDP growth. This shows deeper issues in corporate value creation,” he said. “There could be some short-term flows to gain from an upward blip, but long-term allocations to China are unlikely.”

Gupta also flags China’s economic rot: a bloated debt-to-GDP ratio, shrinking working-age population, and weak bank balance sheets—factors that will continue to give FIIs cold feet, even if tariffs thaw.

Also read | War drums with Pakistan may force FIIs to hit brakes after Rs 50,000 crore buying spree

Still, others see some near-term sparkle in the Chinese pitch. Vivek Rajaraman, Head of Domestic Investment Advisory at Waterfield Advisors, concedes, “From China’s point of view, the economic recovery post stimulus and recent AI successes have increased their appeal. The truce may erode some advantages India gained under the China Plus One strategy. Hence, there may be some short term increase in FII flows to China.”

But don’t count out India just yet. “India’s structural growth story is intact,” Rajaraman added. “FIIs have returned over the past few months, drawn by a stable currency and strong rally. Many Indian firms are in sectors insulated from China trade dynamics, like pharma and IT.”

That said, the real battleground might be manufacturing—a crown jewel in India’s policy push.

“China is likely to regain cost competitiveness in electronics, textiles and to a lesser extent pharmaceutical APIs. Businesses like continuity and this trade deal will increase the costs of shifting from China to other nations. While some shift in electronics manufacturing to India has happened, India will have to rework its production, supply chain and logistics costs to remain competitive,” he said.

Dr. Gupta, however, sees this as a controlled decoupling rather than a reversal. “The US-China deal is about slowing down the shock from rearchitecting global supply chains,” he said. “China+1 will continue. India will still be in the picture, especially with bilateral deals like the India-UK pact keeping export engines humming.”

Bottom line? The truce may prompt some fast money to flirt with China, but India’s long-game isn’t in question—yet.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)