In its latest June 2025 report, GMO (Grantham, Mayo, & van Otterloo), a globally respected investment management firm, has cast a cautious tone on Indian equities. While foreign investor flows have seen a recent uptick since April, GMO believes that this reversal may be temporary, driven not by fundamentals, but by short-term relief in global risks, including the postponement of tariffs by the Trump administration and a cooling in market volatility.

Despite the current rally, GMO’s Systematic Global Macro (SGM) Strategy continues to hold India as a large short position, making it a contrarian player in the market that many investors still view as a long-term growth story.

Why GMO Is Wary of India Right Now

According to GMO, the valuation and sentiment setup in India does not support sustained foreign inflows. The current dynamics in the Indian equity markets reflect:

• Forward Price-to-Earnings (P/E) ratios above historical median, signaling expensive valuations

• Weak 12-month price momentum, which undermines market sentiment and investor confidence

This mix is not favorable. Historically, foreign investors prefer to invest in markets that are both undervalued and showing strong momentum—a combination that typically yields higher returns. That’s not the case for India currently, GMO points out.

Foreign Flows: Driven by Relief, Not Fundamentals

The recent pickup in foreign interest is viewed by GMO as “an exception” rather than a trend. The flows started gaining traction in late March, shortly after:

• The Trump administration delayed key tariff announcements, lowering trade tensions

• The India Volatility Index (VIX), which had spiked to 52 in April, dropped sharply

• Better-than-expected CPI inflation data from the US helped lower global macro fears

These developments provided a temporary tailwind, but not a solid macro or microeconomic foundation to justify re-rating Indian equities. GMO highlights that unless valuations improve and corporate sentiment turns positive, a durable foreign buying cycle is unlikely.

India’s Weakness Among Emerging Markets

Interestingly, GMO’s concerns are not limited to India in isolation. When placed against the backdrop of broader emerging markets (EM), India still appears overstretched:

• Valuation models predict underperformance of Indian equities versus broader EM indices

• Corporate margin stress and uncertain earnings growth outlook raise red flags

• Sentiment models remain negative, reflecting poor expectations about future profitability

As a result, GMO’s SGM Strategy continues to short India within its EM allocation, taking a contrarian stance against the recent rally seen in local markets.

India’s Outperformance vs Foreign Flow Weakness

Over the past two years, Indian equities have outperformed global peers, thanks to:

• Strong domestic liquidity

• Robust retail investor participation

• A vibrant IPO pipeline

• Supportive government policy signals

However, foreign flows have remained patchy, highly sensitive to global macro conditions like US inflation, Fed rate expectations, and geopolitical tensions. GMO believes this makes India’s rally particularly fragile, as it lacks synchronized support from both domestic and foreign investors.

Foreign Flows & Market Returns: The Historical Connection

GMO also draws attention to an important historical pattern:
Market returns on days with positive foreign flows are significantly higher than on days when foreigners are net sellers.

This underlines the critical importance of sustained foreign investment in supporting index-level returns. Without this, even the most fundamentally solid markets may struggle to retain upside momentum.

That’s why GMO’s skepticism carries weight. If foreign buying is not rooted in fundamentals, it could quickly reverse on the back of:

• Renewed geopolitical tensions

• Tariff escalations

• Weak corporate earnings

• Deterioration in local sentiment

Key Risk Factors to Watch Ahead

As India moves into a busy July-August macro calendar, investors should monitor several triggers that could sway sentiment:

1. Release of key economic data in July – especially GDP growth, industrial output, and inflation

2. RBI’s monetary policy announcement in August – any rate action or shift in tone could influence both domestic and foreign flows

3. Global cues from the Fed, ECB, and ongoing US-China trade dynamics

4. Corporate earnings for Q1FY26, which could either support or break the valuation narrative

If any of these events create negative surprises, the short-term foreign optimism could vanish as quickly as it arrived.

The Contrarian Bet: GMO’s Position Explained

Despite broad optimism among many global and local funds, GMO has retained its short position on India due to:

• Rich valuations

• Weak earnings growth

• Uninspiring momentum

• Poor sentiment indicators

This strategy is not permanent, but it does highlight how institutional money managers evaluate multiple dimensions—beyond just price action—before committing capital to a market.

Conclusion: Temporary Calm or Start of a Trend?

GMO’s June 2025 commentary serves as a sobering reminder that foreign flows alone do not equal a healthy market. While India continues to enjoy structural advantages—including demographics, consumption growth, and reforms—the valuation premium and weak momentum are real headwinds.

Investors must remain cautious. As GMO puts it, "Today’s foreign flows appear to be an exception, not the rule." Unless the upcoming economic data and corporate performance reinforce India’s value proposition, global capital may again turn away, triggering volatility.

The current moment is a cautious comeback—not a resounding endorsement. Only time (and earnings) will tell if this flow reversal has legs.

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