Foreign Portfolio Investors Reverse Course, Become Net Buyers in Indian Market
After three consecutive months of sustained selling, overseas investors have dramatically shifted their stance on the Indian stock market, turning net buyers in February. This significant reversal appears to have been catalyzed primarily by the interim trade agreement between India and the United States, even as corporate earnings from the December quarter present a mixed picture so far.
Market Indices Witness Sharp Rally on Renewed FPI Interest
The renewed foreign investor interest propelled frontline indices to experience a substantial rally. Both the benchmark Nifty 50 and the Sensex closed last week with impressive gains of 3.50% and 3.60%, respectively. The broader market, which had been underperforming, also received a considerable boost. The Nifty Midcap 100 and Nifty Smallcap 100 indices each surged up to 4% during February so far, indicating a broad-based recovery.
FPI Inflows Hit ₹8,120 Crore in February After Massive Outflows
According to data from the National Securities Depository Limited (NSDL), Foreign Portfolio Investors (FPIs) have poured ₹8,129 crore into Indian equities in February so far. This marks a stark contrast to their recent behavior, where they withdrew billions from local markets in search of better opportunities in other emerging economies. Specifically, FPIs pulled out ₹35,962 crore in January, ₹22,611 crore in December, and ₹3,765 crore in November, making the February inflow particularly noteworthy.
Interim India-US Trade Deal Acts as Primary Catalyst
Market analysts identify the interim trade framework between India and the United States as the principal driver behind this shift in foreign investor sentiment. The agreement, announced on Friday, removes a key market overhang, brightens the outlook for Indian exports, and potentially enhances the competitiveness of Indian-made goods relative to other Asian exporters. The framework aims to lower tariffs, reshape energy cooperation, and deepen economic ties as both nations work to realign global supply chains.
Analysts also point to a concurrent slowdown in the global artificial intelligence (AI) trade, which had previously powered certain markets, as prompting overseas investors to refocus their attention on Asia's third-largest economy.
Budget Measures and Rupee Strength Provide Additional Support
While unexpected announcements in the Union Budget 2027, such as the increase in Securities Transaction Tax (STT), initially dented market sentiment, other fiscal measures helped limit the damage. These included higher capital expenditure allocation, a lower fiscal deficit target, and the government's commitment to reducing central government public debt as a percentage of GDP.
The India-US trade deal also provided a much-needed boost to the Indian rupee, which strengthened by 1.3% against the US dollar in February so far. Currency appreciation and favorable trade agreements are now seen as potential triggers for reviving sustained FPI inflows.
Expert Analysis on Market Sentiment and Future Outlook
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, described last week as eventful for stock markets. "The Union Budget, the India-EU trade deal, and the much-awaited India-US trade deal happened during the week, and these events had a major impact on the market," he stated. "The market reacted negatively to the hike in STT on F&O trades but smartly recovered on news of the US-India trade deal."
He highlighted a key change in market sentiment driven by the rupee's appreciation from a record low of 91.72 to 90.30 against the US dollar. "Even though the rupee further weakened to around 90.70 by the close on February 6, the INR is expected to stabilise and gradually appreciate to below 90 against the dollar by end-March 2026," Dr. Vijayakumar added. He believes this currency stability has the potential to trigger more FPI inflows into India, while cautioning that much will depend on the evolution of the global AI trade landscape.
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