Why FIIs Are Returning to India Again as Valuations Ease and Growth Outlook Improves

Foreign institutional investors (FIIs) are making a return, but with caution, to Indian equities after months of sustained selling. Lower crude oil prices, improving valuations and expectations of easier global monetary conditions are strengthening the appeal of one of the world’s fastest-growing major economies.

The returned interest is quite different from the past year, when foreign investors pulled money from Indian markets in favour of opportunities linked to artificial intelligence, semiconductors and data-centre investments in the United States and parts of North Asia.

Experts think the recent inflows are because of domestic resilience and improving global conditions.

“The recent FII comeback should not be viewed as a sudden rush of optimism,” said Pundri Kaksha, Vice President, Alankit Forex Limited. He added, “What has changed is that India is no longer asking investors to pay any price for growth. Valuations have become more reasonable, earnings have remained broadly resilient, and lower crude prices have improved the macro narrative for an economy that imports most of its oil.”

Why FIIs Stayed Away

For much of the past year, foreign investors viewed Indian equities as expensive compared with other emerging markets and saw better opportunities elsewhere.

Kuunal Shah, Fund Manager, Carnelian Asset Management & Advisors, said valuation concerns were only part of the story.

“I believe foreign investors have stayed away from Indian markets not only because valuations were relatively expensive, but also because growth opportunities in other markets were more attractive,” Shah said, adding that, “Emerging markets such as Korea, along with certain sectors in the US, offered relatively higher growth prospects, driven largely by significant capital expenditure in artificial intelligence.”

As global investors rushed into AI-linked trades, capital moved away from many emerging markets, including India. Higher U.S. bond yields and a stronger dollar further reduced the attractiveness of riskier assets.

Nikunj Saraf, CEO of Choice Wealth, noted that foreign ownership in Indian equities has fallen to a 14-year low of 14.7%, creating room for investors to rebuild positions.

“The correction has certainly helped close the valuation gap, but calling India outright cheap would still be a stretch,” Saraf said, adding, “The valuation correction is a necessary condition, not a sufficient one.”

Valuations Have Improved, But Growth Remains the Bigger Draw

India’s appeal now lies in the balance between growth and valuation. Siddharth Maurya, Managing Director at Vibhavangal Anukulkara Pvt Ltd, said the recent correction has improved the risk-reward equation for overseas investors.

“While India is not considered a cheap market when compared to many emerging economies, the recent market correction has made valuations closer to their long-term averages,” Maurya said. He added, “The structural growth story has not changed and has made for an improved entry point over the past six to nine months.”

Kaksha thinks that foreign investors are increasingly prioritising visibility and policy execution over chasing the cheapest markets.

“This is not a case of foreign money chasing a trade. Nor is it simply a China-to-India switch,” he said.

Fed, Global Liquidity 

Another major factor behind the return of foreign money has been the changing outlook for U.S. interest rates.

As expectations for future Federal Reserve rate cuts have increased, investors have begun looking again at emerging markets that offer stronger growth prospects. “When expectations of U.S. rate cuts rise, money generally moves towards emerging markets like India,” Shah said.

Saraf said the Fed’s role should not be underestimated. “The Fed factor alone cannot override India-specific headwinds. What the Fed does is open the door; India’s own macro conditions, particularly crude stability and rupee trajectory, determine whether foreign capital actually walks through it.”

Rajesh Singla, CEO and Fund Manager at Alpha AMC, said global liquidity conditions have improved significantly compared with earlier this year. “The Fed alone is not enough; India needs its own earnings recovery running alongside global liquidity improvement for flows to become structural rather than opportunistic,” Singla added.

Falling Crude

A sharp decline in crude oil prices has further boosted investor confidence. As one of the world’s largest oil importers, India benefits significantly when energy costs fall because it eases inflationary pressures, improves the current account balance and supports the rupee.

“Lower crude prices are certainly positive for India because they help reduce inflation and improve the current account position,” Shah said.

Saraf thinks Crude is arguably the single most important variable in the FPI-India equation right now. He added, “When crude was above $100 a barrel, India’s current account deficit widened, the rupee came under pressure and inflation forecasts moved higher. Brent easing towards $75-$80 changes that calculus on multiple fronts simultaneously.”

According to Saraf, every $10 decline in crude prices saves India roughly $12 billion to $15 billion annually on its import bill, directly improving the country’s macroeconomic profile.

Where Is the Money Going?

Despite the improving sentiment, foreign investors are not buying everything; instead, flows remain concentrated in sectors where earnings visibility is strongest. “We are seeing interest in areas such as capital goods, industrials, healthcare, pharma and consumption where earnings visibility remains relatively strong,” Shah said.

Maurya said information technology and large private-sector banks have also attracted attention because of their valuations, balance-sheet strength and earnings potential.

Singla thinks that investors should not mistake selective buying for a broad market comeback. “Highly selective,” he said. “This is tactical positioning in infrastructure-linked sectors, not broad market conviction.”

Saraf added that the broad-based buying associated with a genuine foreign investor comeback has yet to emerge: “What we are seeing is high-conviction sector positioning, not a market-wide return.”

Domestic Investors 

Perhaps the most significant change during the period of foreign selling has been the rise of domestic investors. Strong SIP contributions and domestic institutional buying helped absorb large foreign outflows and prevented deeper market declines.

“The past year proved that domestic investors can provide stability even when FIIs stay away,” Kaksha said, adding, “Foreign flows may add momentum, but they are no longer the pillar on which the market stands.”

Saraf noted that domestic investors injected tens of thousands of crores into equities even as foreign investors were selling, highlighting the growing maturity of India’s capital markets.

For retail investors, experts say the return of foreign money could create a powerful combination. “If domestic flows stay strong and foreign money also returns, it can become a powerful combination for the next phase of the bull market,” Shah said.

Tactical Rebound or Long-Term Return?

Experts remain cautious about declaring the start of a sustained foreign buying cycle. A durable return, they say, will depend on continued crude oil stability, a supportive global rate environment, a stable rupee and stronger earnings growth from key sectors.

Prasenjit Paul, Fund Manager at 129 Wealth warned that a significant portion of the recent inflows remains strictly tactical, driven by short-term global reallocations rather than permanent structural changes. He noted that while long-term prospects are incredibly strong, it is still too early to call this initial comeback a permanent, long-term trend.

Still, the sharp slowdown in selling and the emergence of buying interest suggest sentiment is changing. Paul believes India’s resilience through one of the largest periods of foreign selling in recent memory offers an important lesson.

“One of the most remarkable things over the last two years has been the market’s ability to remain relatively stable despite significant FII selling,” Paul said, adding, “This shows the growing strength of domestic participation.”

He remains optimistic about the road ahead. “We remain very positive on India’s long-term structural story, and sooner or later whenever FII returns, we will witness a multi-year structural bull market in Indian equities.” 

"The ultimate takeaway for regular investors," Paul concluded, "is that if domestic inflows hold their ground while foreign money structurally returns, it will create a powerful dual engine capable of driving the next major phase of India's multi-year bull market."

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