Have FIIs Ended Their India Exit? Trade Deals and Data Signal a Shift

After nearly two years of persistent selling, foreign institutional investors (FIIs) are once again back at the centre of India’s market conversation. Monthly inflow numbers have turned positive, selling pressure has eased sharply, and Indian equities are no longer being treated as a high-risk outlier among emerging markets. The key question, however, is whether this marks a durable shift in foreign investor behaviour or merely a tactical pause in a longer phase of caution.

A close reading of flow data, macro triggers, and sectoral allocation trends suggests that the prolonged phase of FII exodus from Indian equities is largely behind us, though the nature of foreign participation is now far more selective than in previous cycles.

From Relentless Selling to Flow Stabilisation

Between October 2021 and March 2023, FIIs sold Indian equities worth more than ₹2.4 lakh crore, marking one of the longest and deepest selling phases in recent history. This trend was driven by a sharp tightening of global liquidity as the US Federal Reserve embarked on aggressive rate hikes, pushing bond yields higher and strengthening the dollar. India’s premium valuations, combined with geopolitical uncertainty and slowing global growth, made emerging market allocations increasingly unattractive during this period.

The pressure resurfaced in early 2024. According to NSDL data, FIIs were net sellers of Indian equities to the tune of approximately ₹1.2–1.3 lakh crore during the first half of the year. Yet, unlike earlier episodes, the intensity of selling weakened steadily through the second half, with several months showing near-neutral or marginally positive flows.

By late 2024 and into early 2025, the pattern shifted decisively. Net equity inflows returned, and the “sell-on-rallies” behaviour that had characterised much of the earlier phase gave way to consistent, if measured, buying.

Chart: Groww

What Triggered the Turnaround?

A key inflection point has been the conclusion of the India–US and India–EU trade agreements. These deals have materially improved visibility for export-oriented sectors, reduced tariff-related uncertainties, and eased geopolitical concerns that had weighed heavily on foreign investor sentiment.

Prasenjit Paul, Equity Research Analyst at Paul Asset & Fund Manager, 129 Wealth Fund, believes this has altered the macro calculus for global investors. “The back-to-back India–US and India–EU trade agreements have meaningfully improved the macro landscape by easing the geopolitical concerns that had earlier weighed on foreign investor sentiment. With tariff reductions providing an immediate trigger, the phase of sustained FII outflows now appears largely behind us, pointing to a clear turnaround in capital flows.”

Beyond trade policy, India’s relative growth advantage continues to stand out. With GDP growth projected in the 6.5–7 per cent range, India remains the fastest-growing major economy at a time when growth in the US, Europe, and China is slowing. For global funds running relative return strategies, India is increasingly viewed as a structural allocation rather than a tactical trade.

The emerging “peak rates” narrative has also helped. As global interest rates approach their upper bound, the opportunity cost of allocating to emerging markets has reduced. Historically, even modest declines in US bond yields have triggered sharp reversals in capital flows towards countries like India.

The Role of Domestic Investors in Changing the Equation

One of the most underappreciated shifts during this period has been the rise of domestic institutional investors (DIIs) as a stabilising force. While FIIs were net sellers over the past two years, DIIs invested over ₹3 lakh crore into Indian equities, absorbing selling pressure and limiting drawdowns.

This growing domestic participation has reduced India’s vulnerability to sudden foreign exits. For FIIs, this matters. Markets supported by strong local capital pools are perceived as more resilient, making re-entry less risky when global conditions stabilise.

Where FIIs Are Deploying Capital Now?

The return of foreign money does not resemble the broad-based index buying seen during the liquidity-fuelled rally of 2020–21. Instead, flows are increasingly targeted.

Export-linked manufacturing, capital goods, electronics, auto ancillaries, and companies positioned within global supply chains are seeing renewed interest, particularly those expected to benefit directly from trade agreements and tariff reductions. On the other hand, overvalued consumer tech stocks, low-growth defensives, and segments with weak earnings visibility continue to see limited participation.

Paul cautions that this phase demands a more discerning approach. “While this is a positive development for Indian equities overall, the benefits of renewed liquidity are unlikely to be evenly distributed. The market is shifting into a true stock-picker’s phase, where returns will be driven by identifying companies that stand to gain directly from these trade agreements rather than relying on broad index-led exposure.”

Chart: Groww

Valuations Remain a Filter, Not a Barrier

Indian equities continue to trade at a premium to most emerging markets, with the Nifty 50’s forward price-to-earnings ratio remaining above long-term averages. However, this premium is increasingly being evaluated in the context of earnings growth rather than dismissed outright.

Consensus estimates project earnings growth of 13–15% CAGR over the next two years. For many FIIs, this offers sufficient justification to pay up selectively, particularly in sectors with strong balance sheets and global revenue linkages.

So, Are FIIs Really Back?

The data points to a qualified yes. While foreign ownership levels are still below their 2021 peaks, the direction of flows has clearly turned. The era of indiscriminate selling appears to be over, replaced by a more calibrated, earnings-driven approach to Indian equities.

This is not a return to easy liquidity or momentum-led rallies. Instead, it marks a transition to a more mature phase of foreign participation, where trade policy, earnings visibility and company-specific fundamentals drive capital allocation decisions. For Indian markets, that shift could ultimately prove more durable than any short-term surge in inflows.

Also read: https://www.republicworld.com/business/it-stocks-sink-as-ai-jitters-erase-over-2-lakh-crore-in-a-day