Foreign portfolio investors (FPIs) are returning to Indian equities, but the buying is far from a broad vote of confidence.
FPIs invested more than ₹25,000 crore in Indian stocks between 1 and 24 August, the strongest monthly inflow since September 2024, after putting ₹20,200 crore into the market in July. If the trend holds, foreign investors will have bought Indian equities for two consecutive months for the first time this year—a sharp reversal from the record monthly outflow of nearly ₹1.2 trillion in March.
Yet global fund managers remain wary. India has replaced Indonesia as Asia’s least-preferred equity market in Bank of America’s August fund manager survey, with 32% of respondents net underweight on Indian stocks.
The disconnect points to a narrower shift: foreign investors are rebuilding exposure to parts of the market where recent corrections have improved valuations and earnings visibility, rather than making a broad bet on India. Their choices reflect uncertainty over global growth, bond-market returns and the artificial intelligence (AI) trade even as domestic earnings hold up.
Selective buying
Financial services drew the most FPI money in the first fortnight of August, attracting ₹6,535 crore after an outflow of ₹2,669 crore in the previous fortnight, according to National Securities Depository Ltd data.
Automobiles followed with ₹4,405 crore, nearly twice the inflow in the second half of July, while consumer services attracted ₹3,398 crore, up from ₹2,840 crore in the previous fortnight.
These are sectors foreign investors traditionally favour, and recent corrections have improved their risk-reward equation, said Divam Sharma, co-founder of Green Portfolio PMS.
The Nifty Financial Services index trades at 17.3 times 12-month trailing earnings, below its five-year average of 19.5 times. The Nifty Auto index trades at 33.6 times, against an average of 41.8 times, while the Nifty Consumption index is at 42.3 times, below its 47.2-times average.
The Nifty 50 trades at 21.8 times earnings, below its five-year average of 23.1 times, suggesting the valuation reset is making selected parts of the market more attractive even as foreign investors remain cautious on India overall.
A shift from cyclicals
The contrast is clearest in the sectors losing foreign money. Capital goods, power and realty saw some of the strongest FPI outflows between 1 and 15 August, while telecom led the decline with an outflow of ₹3,322 crore.
Telecom, power and capital goods have also seen consistent outflows for nearly two months, signalling a shift away from overvalued and rate-sensitive businesses towards companies with greater earnings and demand visibility.
The prospect of persistently higher borrowing costs is a key driver of this sectoral rotation, said Harsh Gupta Madhusudan, fund manager of Ionic Asset’s PIPE Fund.
On 18 August, the 30-year US Treasury yield climbed to 5.34%, the highest since 2007, as investors dumped US bonds after the national debt breached $40 trillion. The sell-off in US debt reflected growing concerns over the sustainability of America’s fiscal position and pushed global long-term bond yields higher.
At the same time, some of India's capex and cyclical stocks have risen sharply in recent months, making their valuations less compelling, Gupta added. The Nifty Infrastructure index trades at 24.4 times 12-month trailing earnings, slightly above its five-year average of 23.8 times.
Foreign investors have therefore gravitated towards businesses with relatively predictable domestic demand, which continues to benefit from the government’s FY26 consumption stimulus.
Domestic urban consumption is also benefitting from global capability centre expansion, while government subsidy spending supports rural activity, Gupta said.
The rupee’s recent stability against the US dollar, along with a strong June-quarter earnings season for India Inc., also helped support foreign inflows, he said.
Nifty 50 profits grew nearly 18% year-on-year in Q1FY27 (April-June), roughly double the Street’s 9% estimate, while the rupee has declined just 0.3% against the US dollar since the Reserve Bank of India’s last policy intervention on 5 June.
The central bank began covering currency-hedging costs on foreign currency non-resident (FCNR) deposits for domestic banks, among other measures, to attract dollar inflows and arrest the rupee’s slide, which had already exceeded 6% in the first half of 2026.
The growth test
The recent preference for earnings visibility and domestic demand does not necessarily signal expectations of an uninterrupted consumption boom, Sharma of Green Portfolio PMS cautioned.
Much of India Inc.’s earnings momentum still rests on low bases, consumption stimulus, rupee depreciation, commodity gains and margin recovery—tailwinds that Nuvama Institutional Equities expects could fade as FY27 progresses.
That could limit broader allocations to India given its lack of AI exposure and competition from other tech-driven Asian markets, Sharma said.
The Bank of America survey reinforces that concern: lack of clear AI exposure was the biggest concern cited by fund managers, followed by weak growth, while high valuations and a lack of reforms were also among the reasons for the bearish view.
Currently, India’s MSCI Emerging Markets Index weight is around 14%, down from its late-2024 peak of 21%, following an AI-driven global capital rotation to Taiwan and South Korea.
For now, the foreign flows suggest a more limited conclusion. Investors are willing to put money back into India where valuations and earnings visibility have improved, but they are not yet making a broad call on the country’s growth outlook.
The return of foreign money, in other words, looks less like an India-wide re-rating than a selective hunt for value.