Capital is not leaving India because it can. It is leaving because, at current valuations and relative opportunities, it increasingly wants to.
Imagine customers walking out of a restaurant, leaving much of their food uneaten. A sensible owner would not lock the doors to prevent them from leaving. He would examine the leftovers, taste the food and ask a more fundamental question: what went wrong with the offering?
India’s capital markets need to ask themselves the same question.
A growing argument suggests that Indian equities are underperforming because investors can exit too easily. The abundance of liquidity, the argument goes, makes selling convenient and intensifies market declines. It is an appealing explanation because it locates the problem in market mechanics rather than market fundamentals. But it mistakes the freedom to leave for the reason investors choose to do so.
Markets do not underperform because capital has an exit door. They underperform when investors find better opportunities elsewhere.