After a prolonged phase of heavy selling, foreign institutional investors (FIIs) have shown a tentative return to Indian equities, marking a potential shift in sentiment for the underperforming market. The benchmark indices, Sensex and Nifty, have significantly lagged behind their global and Asian counterparts this year, weighed down by massive foreign capital outflows, earnings concerns, and external trade tensions.
A Record Year of Outflows Sees a Brief Respite
The year 2025 has been the worst on record for FII outflows from India, with net selling exceeding a staggering ₹155,000 crore. This exodus was driven by a combination of a weak Indian rupee, the impact of steep 50% US tariffs imposed by President Donald Trump, high market valuations, and a noticeable slowdown in corporate earnings.
However, a flicker of change emerged recently. Data shows that FIIs turned net buyers in a week, bringing in inflows of ₹1,346.3 crore. Specifically, they were net purchasers on three days between December 17 and 19, suggesting a tactical repositioning.
What Triggered the Sudden FII Interest?
Analysts point to a confluence of factors that made Indian assets momentarily attractive. The recovery of the Indian rupee past the 90 mark against the US dollar, following intervention by the Reserve Bank of India (RBI), played a meaningful role. The rupee had previously slumped below 91 versus the dollar.
"For FIIs, currency stability directly improves dollar returns and reduces hedging costs. Even a modest appreciation or reduced volatility in the rupee can trigger tactical inflows," explained Raj Gaikar, Research Analyst at SAMCO Securities. He added that this wasn't the only reason, noting that Indian equity valuations have become more reasonable after a prolonged consolidation, especially in large-cap financial and IT stocks, which are traditional FII favourites.
Furthermore, a decline in global bond yields provided a tailwind. As US Treasury yields retreated from their peaks—with the two-year yield down 72 basis points and the 10-year at 4.1589%, down 42 bps this year—the appeal of riskier emerging market equities, including India's, improved. India's relatively stable domestic macroeconomic environment continues to give it an edge over many other emerging markets.
Will 2026 Bring Sustained Foreign Investment?
Looking ahead to 2026, market experts express cautious optimism but temper expectations of a floodgate opening. They anticipate a recovery in flows, but one that is balanced and selective rather than a sharp, one-directional surge.
Analysts suggest that if the global trend of easing interest rates continues and the US dollar weakens, India could attract more sustained foreign capital, backed by its strong structural growth narrative. However, volatility is expected to persist. Future inflows are likely to be stock-specific, focusing on high-quality companies with clear earnings visibility rather than broad-based buying.
Echoing this view, Gaikar stated that a gradual, stock-specific reallocation is more probable than a dramatic reversal. The sustainability of FII inflows into 2026 will hinge on the pace of global rate cuts, a concrete recovery in corporate earnings, and India's ability to maintain its macroeconomic stability.
