Can Rs 6.6 lakh crore in potential PSU divestments bring FPIs back to Indian markets? Axis Capital explains
In a report titled “Strong divestments can support capital flows and fiscal aims”, Prateek Ancha, Chief Economist at Axis Capital, said a sustained divestment programme could expand the investable universe, deepen market free float and generate substantial receipts for the government.
“Accelerating government divestments could address India’s equity market imbalance by expanding the investable universe, easing valuation pressures, and reducing incentives for foreign capital outflows,” Axis Capital said.
The brokerage said the case for accelerating divestments has become more compelling as fiscal risks mount, threatening fiscal targets.
“A sustained divestment programme could generate substantial receipts, deepen market free float, support fiscal consolidation, and strengthen capital flows,” it said.
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Why are FPIs selling Indian equities?Axis Capital said foreign capital outflows over the past two years have taken place despite relatively strong performance from emerging markets.
The emerging-market benchmark index has outperformed the US over the past 18 months, yet emerging-market funds have continued to see net outflows. The US attracted a record US$735 billion in FPI inflows in calendar year 2025, according to the brokerage.
Taiwan and South Korea, which have been key beneficiaries of the artificial intelligence theme, have also seen large outflows despite rising benchmark index weights. Axis Capital attributed this primarily to single-stock weight limits in portfolios.
At the same time, the brokerage said flows have increasingly favoured China and Brazil.
India’s case has been different, with valuations and earnings playing a key role in foreign selling.
“In India’s case, expensive valuations and prolonged earnings disappointment were the primary drivers of foreign selling,” Axis Capital said.
Strong domestic inflows, however, have allowed FPIs to sell Indian equities while finding buyers in the secondary market.
“Strong domestic inflows also provided FPIs an exit by absorbing secondary market selling at high valuations,” the brokerage said.
How could PSU divestments help?
Axis Capital’s argument is that accelerated government divestments could increase the supply of investable equities and address the demand-supply imbalance in the Indian market.
India’s equity market has enjoyed strong demand in recent years, but much of that demand has been met by supply at high valuations, according to the brokerage.
The government has an opportunity to expand the investable universe through stake sales. Its holdings in listed companies have risen to Rs44 lakh crore, roughly four times pre-pandemic levels, Axis Capital said.
These holdings are significantly concentrated in banks and non-banking financial companies.
“Accelerated divestments could help narrow the demand-supply imbalance, reduce pressure for foreign investor exits, and address the market’s underlying plumbing problem of excess demand for equities,” Axis Capital said.
The brokerage also expects greater supply of shares to help contain valuations, particularly among mid-cap and small-cap stocks.
“This might also help contain valuations, particularly in the mid-cap and small-cap segments,” it said.
The report’s argument is that expanding the supply of listed shares and increasing market free float could ease valuation pressures and, in turn, reduce some of the incentives for foreign investors to exit Indian equities.
Rs 6.6 lakh crore potential from lower government ownership
The potential scale of the divestment programme is significant.
Axis Capital estimates that a 15% reduction in government ownership over the next three years could raise around Rs6.6 lakh crore.
“A 15% reduction in government ownership over the next three years could raise ~Rs6.6tn, expand market free float, and help reduce the risk of capital outflows,” the brokerage said.
The government has already achieved 70% of its FY27 divestment target in the first five months, according to Axis Capital. The brokerage said this was largely through the LIC offer for sale.
More stake sales are in the pipeline, including IDBI, it said.
Fiscal pressures strengthen the case for divestment
The case for faster divestment is not limited to the equity market. Axis Capital said rising fiscal pressures make government stake sales more important.
The income-tax shortfall in FY26 has added to concerns over FY27 collections, according to the brokerage. Assuming income-tax growth of 12%, compared with the implied growth rate of 18%, would result in a shortfall of Rs76,200 crore, it estimated.
At the same time, higher subsidy spending is adding to fiscal pressures.
“Closing the gap with sharp expenditure compression would risk undermining growth,” Axis Capital said.
The brokerage expects fiscal strains to persist into FY28 with the implementation of the 8th Pay Commission.
Against this backdrop, Axis Capital said divestment offers a more durable solution.
Divestment as a link between fiscal needs and capital flows
The Axis Capital report makes the case for government stake sales on both fiscal and market grounds.
On the fiscal side, divestment could generate substantial receipts at a time when tax collection concerns and higher subsidy spending are putting pressure on government finances.
On the equity-market side, faster stake sales could increase the supply of listed shares, expand free float and ease the demand-supply imbalance.
According to Axis Capital, these factors could also help reduce the risk of further foreign capital outflows.
The brokerage’s central argument is that India’s equity market has strong demand but an imbalance between demand and investable supply, with valuations remaining elevated. Increasing the supply of government-held shares could help address that imbalance while providing the government with resources for fiscal consolidation.
“Strong divestments can support capital flows and fiscal aims,” Axis Capital said.
This article has been written by Kumar Gaurav, who is not a SEBI-registered Research Analyst or an Investment Adviser. Gaurav and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment.
