The Recalibrated India Bet: FIIs Shift from Momentum to Maturity

As global liquidity normalises and earnings visibility returns, FIIs are rebalancing portfolios with renewed conviction. Early November data already hints at net inflows, breaking the streak of relentless selling. DSIJ explains, this is not a replay of the liquidity-driven surges of the past; it is the dawn of a more discerning era where capital follows clarity, not chaos [EasyDNNnews:PaidContentStart]

The Indian equity market began 2025 caught in a powerful crosscurrent. On one side, a dramatic exodus of Foreign Institutional Investors (FIIs) that began in late 2024 unleashed significant turbulence, rattling investor confidence. Yet, on the other, an unprecedented wave of domestic capital rose to meet the challenge. Domestic Institutional Investors (DIIs), fuelled by record-breaking inflows, provided a powerful counterbalance, absorbing the relentless foreign selling and showcasing the market's newfound resilience. Now, as the dust settles, FIIs are making a visible return. Their new strategy is far more selective, signalling a sophisticated and calculated bet on the core pillars of India's domestic growth story. 

The Unprecedented Outflow
The wave of foreign selling that started in late September 2024 intensified into a storm by early 2025. Since October 2024, FIIs had liquidated over ₹4.34 lakh crore in Indian equities, a sell-off that reached a fever pitch in January 2025 with staggering outflows of ₹87,000 crore. By mid-February 2025, the total net withdrawal for the calendar year had already surpassed ₹1.1 lakh crore. In aggregate, from the market peak in September 2024, foreign investors pulled approximately USD 51 billion out of India, marking one of the most severe periods of capital flight on record. But why did FIIs start selling Indian equity with such high intensity? 

FII selling and buying trends are influenced by a complex interplay of macroeconomic, geopolitical, and internal market factors. The FIIs' decisions often track India’s corporate earnings and valuation cycle while reacting strongly to global liquidity and relative appeal compared to other emerging markets. 

Here is a brief breakdown of how global factors and domestic market dynamics influence FII selling and buying. 

Global Factors Influencing FII Flows
Global conditions play a crucial role, often setting the backdrop for FII risk appetite towards emerging markets like India. 

▪️U.S. Interest Rates and U.S. Dollar: The U.S., being the biggest economy and USD as the global reserve currency, has an outsize influence on the world economy and equity markets including India. A stronger U.S. dollar and higher U.S. interest rates and bond yields have historically made global investors cautious about emerging markets, contributing significantly to FII selling and capital flight, as higher bond yields offer little incentive for FIIs to deploy their funds in these markets. Also, when USD strengthens, FIIs slow down investment in risky assets including emerging market economies as depreciating currency of emerging markets against USD lowers their overall return. 

The above chart shows the relationship between FII flows and the USD/INR rate since the start of January 2024. It clearly highlights the inverse correlation between foreign capital movement and currency strength. Periods of heavy FII outflows, such as from October 2024 to February 2025, correspond closely with a steady depreciation of the rupee, as seen in the rising USD/INR trajectory. The Indian rupee in these months depreciated from ₹84 per dollar to near `87 per dollar. This suggests that when foreign investors withdraw funds from Indian equities, the resulting dollar demand exerts pressure on the rupee and this further pushes the rupee down or, the other way round, when the rupee starts to lose its value, FIIs start selling domestic equities. Conversely, months like March to June 2025, which saw a pause or mild appreciation in the rupee’s external value, coincided with FII inflows, implying stabilisation of the exchange rate amid renewed foreign participation. 

Overall, the analysis underscores a clear sensitivity of the FIIs' flows due to rupee movement against USD. However, the relationship is not perfectly linear; external macro factors also play a significant role in shaping the FII behaviour alongside the USD/INR trajectory. 

▪️Uncertainty and Risk: The market generally dislikes uncertainty. Global uncertainty, driven by geopolitical conflicts (like Russia-Ukraine) and tensions with major nations, can keep FII sentiment risk-averse. 

▪️Trade Policy: Macro and tariff uncertainties (such as the overhang of U.S.-China trade tensions or talks about increasing tariffs on India or reducing them) weigh on corporate client decision-making, particularly impacting export sectors. Clarity on global trade and tariff issues or geopolitical stability are key triggers needed for a revival in FII inflows. 

▪️Emerging Market Comparison and Relative Valuations: FII selling is often driven by the reallocation of capital to markets considered more stable or attractively valued. For instance, in the past couple of years, FIIs redirected additional investments towards China as Indian equities traded at relatively higher valuations compared to their historical averages and to the Chinese market. 

The Indian equity market has long been a favourite among global investors, driven by reasonable valuations compared with other emerging markets and the superior growth performance of Indian companies, which attracted strong FII inflows. This never failed them as India continued to outperform other markets. 

After a decade of commanding one of the steepest valuation premiums among global equities, India’s relative pricing power is undergoing a quiet reset. The valuation gap between India and other emerging markets (EMs) has meaningfully narrowed in the past year, primarily after a phase of relative underperformance. This has made Indian equities appear more reasonable, rekindling interest among global fund managers who were earlier underweight on India due to stretched valuations. 

Traditionally, Indian markets have traded at a premium compared to emerging and Chinese markets — a reflection of their superior corporate governance, earnings resilience, and long-term return profile. However, after the sharp rally through 2023 and early 2024, Indian equities entered a phase of consolidation while several EM peers, led by China, rebounded from depressed levels. This relative underperformance has compressed India’s valuation premium from record highs, bringing it closer to historical averages. 

While the valuation multiple for MSCI India remains elevated, the premium has moderated to around 55 per cent versus the EM basket — compared to nearly 75 per cent a year ago. This normalisation follows a phase of subdued market performance: over the past year, MSCI India delivered a modest -1.2 per cent return compared to EM’s 24.8 per cent and China’s 33.7 per cent. Yet, over longer timeframes, India remains the undisputed outperformer, with 10-year cumulative returns of 115 per cent versus 40.3 per cent for EM and 34.4 per cent for China. 

Despite the short-term valuation reset, India’s structural growth narrative remains firmly intact. GDP growth averaging above 6 per cent continues to outpace the EM average (~4 per cent) and China (~4.5 per cent). Corporate earnings have compounded at roughly 16 per cent CAGR during FY22–25, with consensus projecting 11 per cent for FY26 and 16 per cent for FY27. A deepening domestic investor base — through Mutual Funds, SIPs, and pension participation — is further cushioning volatility arising from foreign outflows. 

We now view this period as a healthy consolidation rather than a correction. India remains a ‘core allocation’ for EM portfolios — supported by earnings visibility, policy stability, and a maturing retail investor ecosystem. While short-term risks persist due to global rate cycles or geopolitical tensions, the medium-term thesis for India as a structural outperformer remains unchallenged. 

Domestic Market Dynamics Influencing FII Flows
FII flows closely track the fundamental health and price levels within the Indian market. 

▪️High Valuations Trigger Selling: FIIs typically reduce exposure when domestic valuations appear elevated or 'too rich'. During periods like late 2024 and early 2025, FIIs engaged in broad, indiscriminate selling, preferring to take profits rather than make fresh investments. We analysed this in detail above. 

▪️Earnings Weakness: Muted profit growth and softer corporate earnings (such as the weaker results seen in Q2, Q3, and Q4 FY25) deter FII buying, keeping them on the sidelines. The Nifty 50’s profit after Tax (PAT) growth, which once clocked over 30 per cent in mid-2022, has steadily decelerated to just about 5 per cent year-on-year by the June 2025 quarter. This moderation in corporate profitability—driven by margin pressures, uneven consumption recovery, and global demand softness—has led FIIs to adopt a cautious stance. Even the Q1FY26 earnings season failed to meet the lofty expectations set earlier, resulting in profit-booking across key sectors. 

However, the tide may soon turn. Consensus estimates suggest that the earnings cycle is far from over. After a brief lull in FY25, analysts expect double-digit earnings growth to resume, projecting 11 per cent and 16 per cent EPS growth in FY26E and FY27E respectively. This optimism is supported by stable macro fundamentals, easing input costs, and improving operating leverage across sectors like manufacturing, Banking, and consumption. As corporate earnings regain traction, FIIs are likely to reverse their selling stance and re-enter Indian equities, drawn by the structural growth story and long-term profitability prospects. In short, the recent pause in FII inflows seems more like a tactical retreat than a structural exit. 

▪️Selective Earnings Upgrades Signal Strength in Key Sectors: Recent earnings revisions among Large-Cap companies reveal a pattern of selective upgrades rather than a broad-based improvement. Market leaders such as Reliance Industries, Larsen & Toubro, Bharti Airtel, and Maruti Suzuki have witnessed upward EPS revisions, supported by robust operational performance, healthy order inflows, and margin expansion. Reliance continues to benefit from strong growth in its retail and Jio segments, while L&T’s expanding Order Book and execution strength have prompted analysts to raise estimates. Similarly, Bharti Airtel’s steady ARPU growth and Maruti’s improved product mix reflect sectoral resilience despite the market’s cautious undertone. 

Earnings Recovery Outlook
A visible recovery in corporate earnings is laying the groundwork for the next leg of market growth. Foreign institutional investors (FIIs) are likely to increase inflows once earnings recovery gains broader traction, expected from Q3FY26 onwards. However, they remain selective, awaiting clear signs of sustained and widespread earnings growth before taking aggressive positions. 

Domestic factors that attract FII buying include policy continuity, robust capital expenditure (capex), and supportive monetary conditions. India’s solid economic fundamentals, such as strong domestic demand, digital transformation, and infrastructure push, are long-term drivers that support FII interest. 

The Domestic Wall of Capital
In this fierce tug-of-war, domestic investors stood their ground. DIIs, comprising mutual funds, pension funds, and insurers, stepped in with historic force, infusing a record USD 73 billion in the first ten months of Calendar Year 2025. Their conviction was evident in January when they purchased approximately ₹86,000 crore worth of equities, nearly offsetting the ₹87,000 crore sold by FIIs. This domestic fortitude culminated in a landmark shift—as of March 31, 2025, DII shareholding in NSE-listed companies (17.62 per cent) overtook FII holdings (17.22 per cent) for the first time in history, marking the rise of a 'domestic wall of capital' that has since redefined market dynamics. 

For six consecutive quarters, DIIs have maintained their lead over FIIs, with ownership reaching 18.4 per cent by September 2025, up from 18 per cent in the previous quarter. Meanwhile, FII shareholding has slipped to 15.6 per cent in Q2 FY26, down sharply from its peak of 20.1 per cent in Q3 FY21, with the absolute value of holdings falling from ₹77.6 trillion a year earlier to ₹70.3 trillion. Bolstered by decisive policy support (GST and income tax reforms), potential monetary easing by the RBI, and benign liquidity, India’s macroeconomic landscape now favours equities. Corporate earnings appear to be bottoming out, valuations have become more reasonable, and domestic asset allocation strategies increasingly reflect an 'overweight' stance on equities. The message is clear: Indian investors are no longer mere spectators in their own market— they are now steering it. 

Stronger participation from domestic institutions acts as a stabilising anchor for India’s capital markets, ultimately benefiting foreign investors as well. When mutual funds, insurers, and pension funds provide consistent inflows, they cushion the market against abrupt sell-offs, reducing volatility and improving liquidity. This steady domestic demand enhances price discovery and gives FIIs greater confidence in the market’s depth and resilience. In essence, a robust domestic investor base not only makes Indian equities less dependent on global sentiment but also creates a healthier, more predictable environment that encourages long-term foreign participation. 

The Turning Point
Just when the narrative around FII exodus seemed firmly set, the tide began to turn. In March 2025, after five straight months of relentless selling amounting to ₹3.23 lakh crore, foreign investors switched sides, becoming net buyers with inflows of ₹2,783 crore. The buying streak extended over the next three months, with cumulative investments of nearly ₹25,000 crore. However, the subsequent quarter saw FIIs revert to selling, though each month’s outflow was smaller than the last. By October, the trend had nearly reversed; except for the final two trading sessions that tipped the month into a modest net outflow of ₹2,300 crore, marking an end to their three-month selling spree and signalling renewed interest in Indian equities. 

A Calculated Bet on India's Core Engine 

From Story to Structure Foreign investors are no longer buying India as a generic 'growth story'. They are now investing within it—surgically, strategically, and with data-driven conviction. The latest FPI (Foreign Portfolio Investor) data from June to October 15, 2025 reveals a decisive pivot: FIIs are betting on the core of India’s domestic economy—financials, autos, infrastructure, telecom, and consumer services—while paring down exposure to exportdriven and defensive plays like IT, healthcare, and FMCG. This marks a structural evolution in FII behaviour. Global giants are no longer sprinkling money across the Indian market; they are making targeted allocations into the engines of real economic activity—credit creation, consumption, and capex. 

Financials
The most dramatic reversal in FII sentiment has been towards the financial services sector. After relentlessly selling financials between October 2024 and February 2025, resulting in cumulative outflows of ₹31,940 crore, FIIs staged a stunning comeback. In just the last two weeks of April 2025 alone, they pumped ₹22,910 crore back into financial stocks. 

This was not mere bargain-hunting; it was a high-conviction endorsement of India’s credit cycle and a vote of confidence in the balance-sheet health of its banks and NBFCs. With corporate deleveraging largely complete, retail credit expanding at double digits, and asset quality metrics stabilising, global capital clearly sees Indian financials as the cleanest way to participate in the country’s next economic upswing. 

That ₹1.65 lakh crore increase in holdings between June and October underscores this conviction. Financials have emerged as the bedrock of FII confidence, representing the sector most closely aligned with India’s internal growth engine. 

Capital Goods & Infrastructure
Foreign investors are also rediscovering India’s infrastructure and manufacturing momentum. Between April 16–30, 2025, FPIs invested nearly ₹2,944 crore in capital goods firms. This trend has since accelerated, visible in the steady rise of AUC from ₹3.79 lakh crore in June to ₹3.93 lakh crore in October. 

▪️Sustained public infrastructure spending under Gati Shakti and the National Infrastructure Pipeline.
▪️Strong order inflows for EPC and capital goods companies.
▪️The success of Make in India and the Production-Linked Incentive (PLI) schemes. 

*AUC : Assets Under Custody 

FIIs are effectively positioning to ride the capex multiplier effect, where every rupee spent on infrastructure triggers a broader cycle of industrial output, credit expansion, and consumption growth. 

Pockets of Opportunity
The discerning nature of this FII strategy is evident in their selective buying within niche sectors that represent India’s structural evolution. 

Telecommunication
With nationwide 5G rollout, surging data usage, and the integration of fintech and digital commerce, telecom is no longer a utility; it is a growth proxy. The sector attracted over ₹2,500 crore in FII inflows in the second half of April 2025 and continues to gain traction, reflected in the AUC jump of ₹28,041 crore between June and October. 

Defence and Manufacturing
India’s self-reliance thrust and the modernisation of its defence ecosystem have created a new investable frontier. Global investors are drawn to listed defence and Aerospace firms benefiting from government procurement, offset policies, and export opportunities. 

Automobiles & Auto Components
This sector, too, has turned into a high-conviction cyclical play, with FII holdings surging by `68,723 crore between June and October 2025, fuelled by rural recovery, rising income, and strong festive demand supported by GST cut. 

The Old Guard on the Sidelines
The new FII playbook is defined as much by what is being excluded as by what is being embraced. The rotation away from export-heavy and defensive sectors reflects a global consensus: India’s next growth phase will be domestic-led, not globally leveraged. 

Information Technology (IT)
The IT sector continues to bear the brunt of global risk aversion, with cumulative FII outflows of over `5,100 crore during the June–October period. 

This caution stems from persistent macro headwinds: delayed client spending, muted deal wins, and lack of budget catalysts in the global tech cycle. Still, this does not imply total abandonment; selective buying in large-cap IT names indicates that FIIs are differentiating within the sector, favouring firms with strong AI pivots and resilient margins. 

Consumer Staples (FMCG)
Once the default ‘safe haven’, the FMCG sector has seen heavy profit-booking. Between April and June, FIIs sold roughly ₹12,400 crore worth of FMCG stocks, signalling valuation fatigue. 

While the total holding appears stable due to price appreciation, the net investment flow is negative, reflecting cautious positioning. The preference has clearly shifted towards sectors offering higher operating leverage and cyclical momentum. 

The Structural Recalibration: From ‘India Story’ to ‘India Structure’ 

Foreign capital is evolving from a narrative-driven to an execution-driven mindset. Instead of passively ‘owning India’, FIIs are now engineering portfolios that mirror the real economy, prioritising banking, infrastructure, and domestic consumption as the pillars of sustained growth. 
This represents:
▪️A strategic rotation from global cyclicals to Indian cyclicals.
▪️A shift from earnings momentum to earnings quality.
▪️A transition from valuation comfort to conviction in fundamentals. 

Conclusion
The dripping of FIIs in 2025 is not a rerun of past liquiditydriven cycles; it signals the birth of a more sophisticated and discerning investment thesis for India. The era of indiscriminate, momentum-led inflows has given way to strategic, conviction-based capital allocation aimed squarely at India’s structural, domestic-led growth engine. This new wave of foreign participation is anchored in fundamentals: a reinvigorated financial sector, a robust infrastructure build-out, and the formalisation of consumption. Rather than chasing short-term rallies, FIIs are embedding themselves within the economy’s real arteries—credit creation, manufacturing, and digital expansion. 

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]