Worst of FII selling may be over, but these key factors will determine foreign flows into Indian stock market

After selling Indian equities for seven consecutive months in the cash segment, foreign institutional investors (FIIs) have turned net buyers in February, thanks to an India-US trade deal, which improved the Indian stock market's outlook and supported the Indian rupee.

Over the last seven months, FIIs sold off Indian stocks worth over ₹2.25 lakh crore in the cash segment.

The situations, hopefully, are improving now.

FIIs bought Indian stocks worth ₹5,236.28 crore on February 3, a day after the India-US trade deal was announced. However, the buying slowed significantly, as there was a minor buying of about ₹30 crore on February 4.

Market experts expect the Dalal Street to see a sustained buying from foreign investors as a major overhang- the US tariffs- is now behind.

"While the buying figure was small in the previous session, the more important development is that they have stopped selling. That is a key signal. We will have to see how this trend evolves, but the broader indicators suggest they could gradually turn positive on India," VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, said.

The overall picture suggests FIIs may start nibbling selectively, especially in large-cap stocks. But they are unlikely to return in a big way immediately.

"The closing of the trade deal has lifted the overhang over the equity markets. It is also positive from a currency perspective. A stable currency is a key prerequisite for FIIs to return to Indian shores," Joseph Thomas, Head of Research, Emkay Wealth, noted.

Experts pointed out that while the trade deal with the US and the EU is a massive positive, the return of FIIs will likely be selective rather than a broad-based flood.

Shrikant Chouhan, the head of equity research at Kotak Securities, believes that the worst of the FII selling is over.

"The India-US trade deal has replaced "geopolitical fear" with "policy certainty. Stabilising earnings and a better outlook should attract FIIs. We expect stabilising earnings after a long period of large earnings downgrades and (2) likely strong recovery in earnings over FY2026-28E," said Chouhan.

However, Chouhan noted a few areas of potential earnings downgrades or risks, such as automobiles and components, on the sharp increase in metal prices and consumer discretionary (ex-automobiles), on subdued demand due to low ability or willingness to spend among households.

"We expect FIIs to focus on large-cap companies first, as these are the most liquid and fairly valued segments," said Chouhan.

Key factors that will determine foreign flows

Earnings a key factor for FIIs to come back

A significant growth in Indian corporates' earnings will be a key factor that will keep FIIs invested in the Indian stock market. As experts have been saying, earnings growth is likely to improve from Q4 and more meaningfully in FY27.

Thomas believes that from hereon, the FII inflows will improve, but would be gradual as the focus would shift pointedly towards earnings growth.

"As the visibility in earnings growth materialises, the FII inflows would accelerate further. The sound government finances, the unprecedented thrust on domestic manufacturing and the highest ever public capital expenditure as envisaged in the Finance Bill, put the fundamental case for domestic equities in the winning league," said Thomas.

Rupee's movement

The strengthening of the Indian rupee is also a key factor. If the rupee strengthens, their returns improve in dollar terms, and that typically encourages FIIs to increase allocations.

"It is quite possible that the rupee may move below 90 to the dollar. If exporters start bringing money back to India — which many have been parking abroad — the rupee could strengthen further. That can become a positive cycle, and in that scenario, FIIs are more likely to turn buyers," said Vijayakumar.

The Trump factor

While earnings growth and the rupee's strength will be key factors that determine foreign inflows, the unpredictability of US President Donald Trump remains a key risk.

"The biggest risk is Donald Trump himself. He is highly impulsive, and it is possible that he could suddenly take an aggressive stance on trade, saying India did not agree to certain terms and impose retaliatory measures. That remains a major uncertainty," Vijayakumar said.

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