Foreign flows at a turning point: Why FIIs are watching India closely
FII selling in Indian markets may be easing after months of outflows. Trade deal clarity, rupee stability, and earnings recovery will shape future foreign inflows.
Worst FII selling pressure eases
After months of heavy selling, foreign institutional investors are turning cautious buyers in Indian equities. A favourable India-US trade deal and currency stability are improving sentiment, but experts say sustained FII inflows will depend on earnings recovery, sector outlooks, and global macro conditions.
Foreign institutional investors (FIIs), who had been relentless sellers in Indian equities for months, are beginning to show early signs of a turnaround. After seven straight months of net selling in the cash segment, overseas investors turned net buyers in early February, supported by policy clarity from the India-US trade deal and a firmer Indian rupee.
Since July last year, FIIs had offloaded Indian stocks worth more than ₹2.25 lakh crore in the cash market, exerting sustained pressure on benchmarks and market sentiment. That trend now appears to be softening, offering cautious optimism to Dalal Street participants.
On February 3, FIIs bought Indian equities worth ₹5,236.28 crore, a day after the India-US trade agreement was announced. Although buying activity moderated sharply the following day — with net purchases of only about ₹30 crore — market experts say the shift from aggressive selling to even modest buying is a significant signal.
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, emphasised that the most important change is not the size of buying but the halt in selling. According to him, this suggests that the extreme negative positioning by FIIs may have peaked. He noted that broader indicators now point to the possibility of a gradual improvement in foreign investor sentiment toward India.
The recently concluded trade deal between India and the US has removed a key overhang that had been troubling markets — uncertainty around tariffs and trade relations. Analysts say this policy clarity has improved visibility for corporates and investors alike, replacing geopolitical concerns with a more stable framework for economic engagement.
Joseph Thomas, Head of Research at Emkay Wealth, highlighted that the deal is not only positive for equities but also for the currency. A stable or strengthening rupee is often a critical condition for sustained FII inflows, as foreign investors are sensitive to currency depreciation eroding returns. With the rupee showing signs of stability, the environment becomes more favourable for overseas capital to return.
However, experts caution that FIIs are unlikely to rush back in large volumes immediately. Instead, the expected pattern is one of selective buying, particularly in large-cap stocks with stronger earnings visibility and global linkages. This suggests a measured re-entry rather than a broad-based surge in inflows.
Shrikant Chouhan, Head of Equity Research at Kotak Securities, believes the worst of the FII selling cycle is likely behind. He pointed out that the trade deal has shifted the narrative from “geopolitical fear” to “policy certainty,” which is supportive for valuations and risk appetite. According to him, stabilising corporate earnings after a prolonged phase of downgrades could act as a key magnet for foreign flows.
Chouhan expects a recovery in earnings over FY2026–28, which could further strengthen India’s appeal among global investors. Still, he flagged areas where risks remain. Sectors such as automobiles and auto components face margin pressures due to rising metal prices, while parts of the consumer discretionary space (excluding autos) are grappling with subdued demand as households remain cautious in their spending.
Global macro conditions will also play a decisive role. Factors such as US interest rate trends, global liquidity, commodity prices, and geopolitical stability can influence FII allocation decisions toward emerging markets, including India.
In essence, while the extreme phase of FII outflows may have passed, a sustained revival in foreign investment will hinge on multiple moving parts, earnings recovery, sectoral resilience, currency stability, and global risk appetite. For now, the shift from heavy selling to tentative buying offers a psychological boost, but markets will watch closely to see whether this early trend evolves into a durable comeback.
