Foreign investors return to Indian markets as benchmark indices rise; experts expect sentiment to strengthen ahead of policy cues

Contents

Market Rally Mirrors Renewed Foreign Buying FII Outflows Reverse After Heavy Selling in 2025 Factors Driving the FII Comeback Experts Urge Caution Amid Optimism Sustained Inflows Depend on Policy and Global Cues Conclusion:

After months of persistent selling, foreign institutional investors (FIIs) have turned net buyers in Indian equities, signaling a potential revival in foreign sentiment toward domestic markets. According to NSDL data, between October 7 and October 14, FIIs purchased more than ₹3,000 crore in the secondary market, turning buyers in five of the last seven sessions.

Their participation in the primary market was even stronger, exceeding ₹7,600 crore during the same period. Provisional data from the NSE also indicated that FIIs added another ₹162 crore on October 15, marking a steady inflow trend across equity segments.

Market Rally Mirrors Renewed Foreign Buying

The return of FII inflows has coincided with a broad-based market uptrend. Since early October, the Sensex and Nifty have each gained around 3 percent, while the BSE MidCap index climbed 3.4 percent and the SmallCap index advanced 1.7 percent.

This sharp turnaround comes after an extended phase of foreign outflows earlier in 2025, when investors booked profits amid global uncertainty and shifting interest rate expectations. Analysts now suggest that improving corporate earnings, stabilizing inflation, and strong domestic consumption are driving renewed optimism.

“They have already sold significantly, and the recent buying reflects improving earnings visibility and better macro parameters,” said Deven Choksey, MD of DRChoksey FinServ. “We expect a stronger second half of the fiscal year, with valuations now looking attractive.”

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FII Outflows Reverse After Heavy Selling in 2025

The recent inflows mark a stark reversal from the heavy FII selling seen earlier this year. Between January and September 2025, FIIs sold over ₹2 lakh crore in the secondary market, even as the RBI and government rolled out multiple growth-supportive measures — including GST rate cuts, a repo rate reduction in June, and an upgrade in India’s sovereign rating by S&P.

During that period, Indian equities underperformed global peers, with the Sensex and Nifty gaining just 3 percent, while the MidCap and SmallCap indices declined 3–4 percent. The recent rebound, therefore, indicates renewed foreign confidence in India’s long-term growth trajectory.

Factors Driving the FII Comeback

Market experts attribute the renewed buying to a mix of domestic and global factors. Key triggers include:

Improving corporate earnings visibility for FY26
Attractive valuations post-market correction
Weaker rupee, making Indian assets more appealing
Expectations of a U.S. Federal Reserve rate cut later this month
Optimism over an India–U.S. trade agreement

“Investors are hopeful of a positive outcome on the India–US trade agreement within the next 30 to 60 days,” said Sunny Agrawal, Head of Research at SBI Securities. “This could remove a key overhang and further improve investor sentiment.”

With both Sensex and Nifty trading near record levels, analysts believe that FIIs may continue to increase exposure to sectors such as banking, capital goods, and technology, which are expected to lead earnings growth in the second half of FY26.

Experts Urge Caution Amid Optimism

While the turnaround in flows has buoyed sentiment, some analysts caution that volatility may persist. Historically, brief phases of FII buying have often been followed by renewed selling, especially when global risk appetite changes.

“Valuations have become more competitive compared to other emerging markets,” noted Vinayak Magotra, Product Head at Centricity WealthTech. “However, heavy short positions in derivatives and instances of profit-taking suggest lingering caution. It’s prudent to wait for a clear, sustained trend before calling it a full-fledged FII comeback.”

Still, the combination of favorable policy support, resilient domestic growth, and improving global risk sentiment has reignited optimism for Indian equities as a long-term investment destination.

Sustained Inflows Depend on Policy and Global Cues

Analysts expect that the upcoming U.S. Fed decision, India’s Q2 corporate earnings, and progress on the India–US trade pact will determine whether FII inflows sustain through the remainder of 2025.

If macro stability continues and inflation remains contained, India could regain its status as a top emerging market destination for global capital flows.

Conclusion:

The latest wave of FII buying — exceeding ₹3,000 crore in a week — signals a potential shift in foreign investor sentiment. With valuations stabilizing and growth outlook improving, market watchers believe that India’s equity markets may be entering a new phase of foreign participation — albeit with a cautious undertone.

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