Foreign Investors Return to Indian Equities After Prolonged Selloff
In a significant shift, foreign institutional investors (FIIs) have turned net buyers in the Indian equity cash segment in February, marking an end to a seven-month continuous selling spree. This reversal is largely attributed to the recently announced India-US trade deal, which has enhanced the outlook for the Indian stock market and provided support to the Indian rupee.
End of a Seven-Month Selling Streak
Over the past seven months, FIIs offloaded Indian stocks worth over ₹2.25 lakh crore in the cash segment, creating substantial pressure on the markets. However, the situation appears to be improving now. On February 3, following the announcement of the trade deal, FIIs purchased Indian equities worth ₹5,236.28 crore. Although buying momentum slowed significantly the next day, with only about ₹30 crore in net purchases on February 4, the cessation of selling is viewed as a critical positive signal by market experts.
Expert Insights on the Market Turnaround
VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, emphasized the importance of this development. "While the buying figure was small in the previous session, the more important development is that they have stopped selling. That is a key signal. We will have to see how this trend evolves, but the broader indicators suggest they could gradually turn positive on India," he stated.
Market analysts anticipate that Dalal Street may witness sustained buying from foreign investors, as a major overhang—the threat of US tariffs—has now been alleviated. Joseph Thomas, Head of Research at Emkay Wealth, noted, "The closing of the trade deal has lifted the overhang over the equity markets. It is also positive from a currency perspective. A stable currency is a key prerequisite for FIIs to return to Indian shores."
Selective and Gradual Return Expected
The overall picture suggests that FIIs may begin to invest selectively, particularly in large-cap stocks, rather than returning in a massive wave immediately. Shrikant Chouhan, Head of Equity Research at Kotak Securities, believes the worst of the FII selling is over. "The India-US trade deal has replaced 'geopolitical fear' with 'policy certainty.' Stabilising earnings and a better outlook should attract FIIs. We expect stabilising earnings after a long period of large earnings downgrades and likely strong recovery in earnings over FY2026-28E," said Chouhan.
However, Chouhan also highlighted potential risks in sectors such as automobiles and components, due to sharp increases in metal prices, and consumer discretionary segments (excluding automobiles), owing to subdued demand from households with limited spending ability or willingness.
Key Factors Influencing Future FII Flows
Earnings Growth as a Critical Driver
A significant uptick in corporate earnings is poised to be a pivotal factor in retaining FII interest in the Indian stock market. Experts project that earnings growth is likely to improve from the fourth quarter and more substantially in FY27. Thomas added, "As the visibility in earnings growth materialises, the FII inflows would accelerate further. The sound government finances, the unprecedented thrust on domestic manufacturing and the highest ever public capital expenditure as envisaged in the Finance Bill, put the fundamental case for domestic equities in the winning league."
Rupee's Movement and Its Impact
The strengthening of the Indian rupee is another crucial element. A stronger rupee enhances returns for foreign investors in dollar terms, typically encouraging increased allocations. Vijayakumar explained, "It is quite possible that the rupee may move below 90 to the dollar. If exporters start bringing money back to India — which many have been parking abroad — the rupee could strengthen further. That can become a positive cycle, and in that scenario, FIIs are more likely to turn buyers."
The Trump Factor and Associated Risks
While earnings growth and rupee strength are key determinants, the unpredictability of US President Donald Trump remains a significant risk. Vijayakumar cautioned, "The biggest risk is Donald Trump himself. He is highly impulsive, and it is possible that he could suddenly take an aggressive stance on trade, saying India did not agree to certain terms and impose retaliatory measures. That remains a major uncertainty."
In summary, the shift from net selling to net buying by FIIs marks a positive turn for Indian equities, driven by the India-US trade deal. However, the return of foreign capital is expected to be selective and gradual, contingent on factors such as corporate earnings, currency stability, and geopolitical developments.
