FIIs have turned net buyers of Indian equities in February, marking a tentative reversal after dumping $21 billion since late 2024—$19 billion in 2025 alone and another $2 billion so far in the calendar year. The turnaround follows a strengthening rupee and the announcement of an interim trade deal between India and the US, offering relief to investors who had fled amid currency depreciation fears.
Yet the rally remains perilously fragile. Earnings, the missing piece of India’s market recovery puzzle, continue to underwhelm, threatening to derail any sustained return of foreign capital.
“The trade deal certainly helped remove one of the overhangs for FIIs, as reflected in the recent uptick in foreign inflows and a firmer rupee,” said Amish Shah, Head of India Research at BofA Global Research. “However, it isn’t the only hurdle. Weaker rupee and muted Nifty earnings trajectory (likely in 1HCY26) remain headwinds for sustained FII inflows.”
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BofA expects Nifty to register just 7% earnings growth in FY26, with the weak momentum persisting into the fourth quarter. The firm anticipates earnings could accelerate to 13.5% in FY27, supported by improved loan growth, discretionary demand recovery aided by GST cuts, telecom tariff hikes, and stronger realisations for non-ferrous metals.
The trade deal’s timing proved crucial. India had incurred a trade deficit of $96 billion during April-December 2025, while facing the prospect of 50% tariffs on most merchandise exports to the US—its largest trading partner and source of an estimated $40 billion trade surplus.”FIIs started retreating from the Indian markets on the back of currency depreciation fears due to uncertainties associated with the India-US trade deal,” said Phanisekhar Ponangi, Co-Founder & Head of Investments at Mavenark Wealth. “The FIIs were naturally spooked due to growing tensions between India and the US, leading to record-high tariffs of 50% on most Indian merchandise exports.”
The threat was existential for foreign flows. With India’s trade surplus with the US at risk of shrinking significantly, strong downward pressure on the rupee loomed large.
“The prospects of the trade surplus with the US shrinking significantly were real, which would have led to strong downward pressure on the rupee,” Ponangi said. “The Q3 earnings, on the other hand, weren’t adequately strong to drive earnings and stock prices high enough to offset the losses incurred due to currency depreciation. In this backdrop, the announcement of the broad contours of the India-US trade framework has come at an opportune time for the markets.”
But Ponangi tempered expectations for a full-blown FII return. “While the FIIs may not allocate more to India merely on the back of the trade deal framework, we may see a material reduction in FII outflows in the near term owing to lesser nervousness on the currency front.”
Still, some market watchers see reasons for optimism beyond the immediate relief.
“Sustained FII selling, which has been a major drag on the market, has stopped,” said Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments. “FIIs have been buyers in the market in last few trading sessions. This cannot be taken as a complete reversal of the FII stance but the sustained selling appears to be over.”
Vijayakumar pointed to the dollar’s roughly 10% depreciation over the past year as a potential catalyst for FII rotation. The currency move has significantly eroded dollar gains from US market investments, potentially nudging foreign investors to seek returns elsewhere.
“So FIIs might look for markets outside the US for gains this year and beyond,” he said. “The rupee stability and hope of appreciation in the months ahead also can nudge FIIs to turn buyers in India.”
Shah at BofA outlined several factors that could turn the equation favorable in the second half of 2026: potential Federal Reserve rate cuts that typically trigger emerging market inflows, improving earnings momentum, continued government reforms, potential fiscal stimulus if budgetary estimates see upsides, and clarity on Pay Commission hike quantum.
For now, the nascent rally has brought broader market participation, with mid and small caps rallying alongside large caps, bringing cheer to retail portfolios that had suffered through months of foreign selling pressure.
But until earnings pick up steam, foreign investors are likely to remain cautious buyers rather than committed believers in India’s equity story.
(Disclaimer: The recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times.)
