Large caps stocks under pressure as rising US bond yields, crude prices weigh on foreign flows

Indian equities may be facing a foreign money squeeze, with rising global bond yields and elevated crude prices emerging as the twin pressures behind the recent weakness in large-cap stocks. George Thomas, fund manager for the equity business at Quantum Asset Management Company, said the current macro setup is making overseas investors more cautious on India even as domestic money continues to provide selective support.

Global rates cloud the large-cap outlook

Thomas said his investment approach remains anchored in valuations rather than tactical churn. “We are sticking to the basics, so we have not changed the portfolio much. We are following where the valuations are guiding us,” he said.

But he was clear that the external backdrop has turned less supportive. With global yields moving higher and crude staying elevated, he said, “It’s not a good sign for foreign flows,” adding that this stress is already visible in the underperformance of large-cap indices.

Why foreign investors are holding back

The logic, according to Thomas, is straightforward. When investors can earn close to 5% on US government securities, the hurdle rate for allocating capital to emerging markets rises sharply, especially when currency risks and commodity-linked inflation remain in play.

“As long as you can get close to five percent in a US GSEC, the chances for a foreign investor to aggressively deploy into Indian markets is lower at this point,” he said. That assessment helps explain why large caps, which are typically more exposed to foreign institutional flows, have borne the brunt of the recent selling pressure.

Valuation comfort, but not a trigger yet

Even so, Thomas does not see an outright structural negative for Indian equities. He noted that Indian market valuations relative to global peers have moderated compared with the sharp premiums seen a couple of years ago. In his view, that narrowing valuation gap is a constructive sign, even if it is not yet strong enough to offset the pull of higher developed-market yields.

This suggests India is no longer as stretched on a relative basis, but the market still needs a more favourable global liquidity environment for foreign participation to broaden meaningfully.

Domestic money keeps parts of the market alive

Where support is visible, Thomas said, it is coming largely from local investors. “Wherever there are flows being supportive, are majorly driven by domestic flows,” he said, pointing to continued movement in small-cap indices.

That divergence is increasingly defining the market: foreign investors remain wary of large caps, while domestic liquidity is helping sustain risk appetite in select broader-market segments. For now, the message from fund managers is clear — until yields cool and oil eases, India’s large-cap recovery may remain uneven.