'FIIs are sheep': Aswath Damodaran says now is a good time to invest in Indian stocks

NYU Stern professor and valuation expert Aswath Damodaran believes Indian stocks have become attractive again after a sharp market correction. He has also described the exit of foreign institutional investors (FIIs) as a potential buying signal, arguing that overseas investors often react to prevailing market sentiment.

Damodaran said his assessment of Indian equities had changed considerably since early 2025, when valuations appeared difficult to justify. At the time, Indian stocks were trading at around 31 times earnings, compared with about 20 times now. 

"I was reluctant to invest in India at the start of 2025 precisely because everything looks so expensive. I think at this point, given the correction and given that the India story still has legs to it long term, I think this is a good time to enter," Damodaran said while speaking to ET Now.

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Damodaran said the withdrawal of foreign institutional investors did not necessarily indicate a deterioration in India's long-term investment prospects.

"The fact that foreign institutional investors are leaving to me is a good sign because they're sheep. The fact that they're leaving might be a good sign that this is the time to enter because they often are reactive. They reflect what the mood of the moment is," he said. "Therefore, I feel more upbeat about Indian stock pricing now than I was a year and a half ago."

In February 2025, Damodaran had described India as the world's most expensive equity market, warning that valuations had run ahead of fundamentals. In his blog Musings on Markets, he wrote that "no amount of handwaving about the India story" could justify paying 31 times earnings, three times revenue and 20 times EBITDA for Indian companies in aggregate. He argued that even a compelling growth story could not justify paying excessively high prices for stocks. 

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'India story has hit a reality check'

The professor said investors had become excessively optimistic about India's growth prospects in recent years, overlooking structural weaknesses that could slow progress.

"The India story in many ways has kind of hit a reality check which you knew was coming, but people I think hoped would not come," he said. "In a democracy you never get from one to five without some steps back and in many ways the last year, you've seen some disappointments in the India story."

However, he argued that the recent wave of pessimism may also have gone too far. "There are people now saying there is no India story, this is never going to take off, and I think that's too much of an overreaction as well," he said.

Damodaran, who is also known as a 'valuation guru', maintained that India's long-term economic potential remained substantial, even if the path to growth was unlikely to be smooth.

'You don't need 10% growth'

The professor also cautioned against setting unrealistic economic growth targets merely to justify stock market valuations. "This is where I think it'd be better to be realistic about growth and not set out numbers like we're going to grow at double-digit levels. It's not going to happen. India is not a small economy anymore," he said.

"You don't need 10% real growth to justify 20 times earnings. You might not even need 7% real growth or even 5% real growth if the real growth is healthy growth. So rather than focus on growth rates per se, I'd focus on healthy growth. Growth where there's value created for India, where you're playing to your strengths, not to your weaknesses."