India's ETFs Soar: Global Investing's Premium Problem

Regulatory constraints on overseas investments by Indian mutual funds have created a substantial premium for international exchange-traded funds (ETFs) within India. As of September 30, 2026, Indian-listed international ETFs were trading at an average premium of 30.4% to their net asset value, a stark contrast to two years prior when some traded at a discount. This situation arises because the Reserve Bank of India's $7 billion limit for overseas non-ETF investments and $1 billion for global ETFs, along with Securities and Exchange Board of India's individual AMC limits, have been breached, halting fresh unit creation.

Simultaneously, investor appetite for global diversification has surged, driven by the relatively flat performance of Indian markets compared to robust global returns over the past 18-24 months. This increased demand, coupled with regulatory hurdles that restrict the creation of new ETF units, has inflated prices. While direct overseas investing offers access closer to market value, it involves more complex procedures like opening international brokerage accounts and managing foreign exchange conversions, including brokerage, forex mark-ups, and tax collected at source (TCS).

Recent changes to ETF price band calculations, effective September 7, 2026, have also influenced trading dynamics. The shift in reference for the daily price band from NAV of two prior trading days to the previous day's closing price has, in some instances, allowed prices to follow rising market values. For example, the Motilal Oswal Nasdaq Q50 ETF exhibited a significant divergence between its market price and NAV under the new framework, highlighting the premium challenges.