Foreign investors continued to pare holdings in India’s secondary markets last week, even as domestic equities rallied on the back of sweeping tax reforms and an upgrade in India’s sovereign rating by S&P Global.
This divergence has raised questions on when foreign institutional investors (FIIs) will stage a meaningful return. Market participants believe that for flows to turn decisively positive, relative returns must improve and the domestic growth momentum must translate into broad-based corporate earnings. Until then, inflows are likely to remain uneven despite policy tailwinds.
According to data from NSDL and provisional NSE figures, FIIs offloaded over Rs 2,000 crore between August 18 and 22. During the same period, benchmark indices Sensex and Nifty advanced around 1 percent each, while the BSE MidCap and SmallCap indices gained over 2 percent. This surge in markets was due to over Rs10000 crore buying by domestic investors during the period.
The FII selling is part of a longer trend. FIIs remained net sellers through 2024, citing elevated valuations, patchy earnings and global uncertainties. In 2024, they pulled out more than Rs 1.21 lakh crore from secondary markets, followed by an additional Rs 1.57 lakh crore so far in 2025.
“Valuation-wise, Indian markets are adequately priced. FIIs do not see meaningful upside at these levels given their trading orientation,” said Deven Choksey, MD of DRChoksey FinServ. He added that foreign investors are likely to return only when forward price-to-earnings multiples on Sensex and Nifty drop below 20 times. Currently, the indices trade at one-year forward PEs of 20.62x and 20.4x, above their long-term averages of 19.3x and 18.3x respectively.
Few experts argue that global cues are playing a bigger role in dictating foreign flows than domestic fundamentals. Attractive US bond yields, a firm dollar and bouts of rupee weakness—raising hedging costs—have deterred fresh allocations.
Last week, the US Federal Reserve signalled the possibility of a rate cut in September to counter mounting risks in the labour market, a move that pushed Treasury yields lower and weighed on the dollar. In contrast, the Reserve Bank of India’s cautious approach earlier this month has dampened expectations of further monetary easing, casting a shadow on overall sentiment.
“Clear signs of global monetary easing, along with rupee stability and consistent earnings upgrades, could revive flows into Indian equities,” said Akshat Garg, AVP at Choice Wealth.
Meanwhile, sentiment among global emerging market (EM) investors has soured. According to Bank of America’s latest fund manager survey, India has fallen from being the most-favoured to the least-preferred Asian equity market within two months.
A Nomura analysis of 45 large EM funds shows relative allocations to India dropped by 110 basis points in July, with 41 funds reducing exposure. Allocations now stand at a negative 2.9 percentage points relative to the MSCI EM benchmark—the steepest underweight positioning in the region. By contrast, Hong Kong, China and South Korea have emerged as key beneficiaries, with allocations rising by 80, 70 and 40 basis points respectively, underscoring a decisive regional rebalancing away from India.
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