Relief rally sparks hope, but FPIs say Indian equities still lack the catalyst for a durable turnaround

Contents

Trade uncertainty and geopolitics continue to unsettle foreign investors Currency volatility remains a key overhang for foreign flows Earnings momentum is mixed and no longer a strong support Here’s what happened today and why traders reacted Valuations have cooled, but FPIs say they are still not compelling What could change the narrative for Indian markets What this means for investors and portfolios

Indian equities may have snapped their three-day losing streak with a modest rebound on Thursday, but foreign portfolio investors (FPIs) are not convinced that the worst is over. Despite improving valuations and supportive global headlines, overseas investors say stronger domestic triggers are still missing for a sustained market revival.

At 11:32 am on Thursday, the Nifty was trading about 0.2 percent higher, breaking a losing streak. Yet the broader picture remains fragile: the benchmark index is down 4.5 percent till January 21, while more than half the stocks in the BSE Smallcap index have corrected over 10 percent. For FPIs, that divergence tells a deeper story about confidence — or the lack of it.

Trade uncertainty and geopolitics continue to unsettle foreign investors

The relief rally was partly triggered by softer global commentary after US President Donald Trump backtracked on proposed EU tariffs, softened his stance on Greenland, and hinted at a “good trade deal” with India. But fund managers say such episodic optimism does not resolve the structural uncertainty surrounding global trade.

Rashi Talwar Bhatia of Ashmore explained that the concern around a potential India–US trade deal goes beyond direct export exposure.

“The deal is not relevant anymore. The first derivative impact is minimal — about 2% of exports go to the US. But the worry is the second derivative impact,” she said, referring to the risk of Chinese goods being diverted into European markets and disrupting global trade flows.

She added that unpredictability itself has become the bigger risk.

“The Greenland issues, for example, came out of the blue. There is just too much unpredictability,” Bhatia said.

Hiren Dasani, Chief Investment Officer (Emerging Markets) at WhiteOak Capital, echoed similar concerns.

“With each passing day of delay in US–India trade deal, market is trying to factor in long-term implications of higher tariff,” he said, adding that any genuinely positive breakthrough could still shift sentiment quickly.

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Currency volatility remains a key overhang for foreign flows

Beyond geopolitics, rupee volatility is emerging as a critical factor shaping foreign investor behaviour. FPIs measure returns in dollar terms, and currency instability directly raises the hurdle rate for fresh allocations.

Bhatia explained that the rupee’s weakness reflects both structural and cyclical factors.

“The rupee should depreciate 3–4% every year against the dollar, based on the inflation differential. What happens in reality is that this depreciation does not happen linearly, so during volatility we see sharper corrections,” she said.
“Right now, we are in oversold territory. It will retrace back.”

Dasani was more cautious on near-term flows.

“Rupee is a key factor that is worrisome for foreign investors because they care only about dollar returns. It raises the hurdle for investors to commit. Till the rupee stabilises, they will remain cautious,” he said.

For equity investors, this means FPI inflows may remain intermittent, even if domestic valuations appear reasonable.

Earnings momentum is mixed and no longer a strong support

Another area of concern for global funds is the lack of strong earnings acceleration. While some pockets have shown resilience, India’s corporate growth narrative is no longer clearly outperforming global peers.

Bhatia believes domestic growth remains the decisive factor.

“Either geopolitics will settle or markets will become immune to it. Domestic growth has to be strong; that’s the main thing for our markets,” she said.

She did acknowledge selective positives:

IT companies have delivered better-than-feared results
Banks are seeing healthier credit growth
Valuations in several sectors now look more reasonable

“Results are slightly better, but stocks are still down, which makes valuations more palatable,” she noted.

Dasani, however, pointed out that other global markets are benefiting from stronger structural themes.

“Other markets have been growing faster on the strength of AI, semiconductors, defence and so on,” he said, suggesting India currently lacks a comparable earnings super-cycle.

Here’s what happened today and why traders reacted

Thursday’s rebound was driven more by sentiment relief than fresh conviction. Traders responded to:

Trump’s softer tone on tariffs and Greenland
Short covering after three sessions of selling
Valuation comfort in select large-cap names

But the limited upside and continued weakness in broader markets show that institutional investors are still cautious. The rally reflected tactical positioning rather than long-term accumulation.

Valuations have cooled, but FPIs say they are still not compelling

The recent correction has eased valuation pressure, especially in midcaps and smallcaps. Yet FPIs argue that prices are now in a “neutral zone”, not yet cheap enough to trigger aggressive buying.

Bhatia was blunt about earlier excesses.

“There was no reason why there was so much strength in the markets,” she said, adding that the ongoing correction is healthy.
“Speculative hands are getting pushed out of the market, which is actually good.”

Dasani offered a valuation framework investors should note:

“Currently valuations are in line with long-term average multiples of the last 10 years. It’s a neutral zone. Unless valuations become compelling, there is no urgency to buy India now.”

For investors, this suggests the market may stabilise before it truly rallies, rather than bounce sharply.

What could change the narrative for Indian markets

Both fund managers agree that a durable rally will require a narrative shift, not just incremental news flow.

Dasani outlined potential triggers:

A genuinely favourable India–US trade deal
Positive surprises in the Union Budget
Structural reforms such as ease of doing business
Expansion of production-linked incentive (PLI) schemes

“Something has to change, possibly surprise announcements in the Budget or a truly favourable trade deal,” he said.

He also stressed that fiscal discipline remains crucial for currency stability and investor confidence, suggesting that markets will reward structural reforms over short-term stimulus.