After nearly two years of continuous selling, foreign institutional investors (FIIs) are showing early signs of returning to Indian equities, marking a potential shift in market sentiment.

Improving Global Sentiment, Lower Crude Prices and Attractive Valuations Encourage Foreign Investors to Return to Indian Markets

After nearly two years of continuous selling, foreign institutional investors (FIIs) are showing early signs of returning to Indian equities, marking a potential shift in market sentiment.

According to a report by Motilal Oswal Financial Services (MOFSL), foreign investors have started turning cautious optimism towards Indian stocks after a prolonged period of outflows triggered by geopolitical uncertainty, expensive valuations and global risk aversion.

Foreign investors have sold nearly $60 billion worth of Indian equities since the market peak in September 2024, creating one of the longest selling phases witnessed in recent years.

However, the recent improvement in global conditions, easing West Asia tensions, softer crude oil prices and attractive valuations have started improving investor confidence.

FII Flows Turn Positive After Months of Selling

The biggest indication of improving sentiment came in the second half of June 2026.

According to MOFSL:

FIIs turned net buyers worth $1.3 billion during the second half of June
This followed $4.3 billion of net outflows during the first half of June

The turnaround suggests foreign investors may have started selectively increasing exposure to Indian equities after remaining cautious for an extended period.

Although June remained the fourth consecutive month of FII selling, the intensity of outflows reduced significantly compared with earlier months.

Why FIIs Were Selling Indian Equities

Foreign investor selling accelerated due to multiple global and domestic concerns.

Key factors behind the outflows included:

Geopolitical Uncertainty

Escalating tensions in West Asia increased concerns about global energy supply and economic stability.

The conflict triggered volatility in crude oil prices, raising concerns about inflation and India’s import bill.

High Market Valuations

Indian equities traded at a premium compared with several emerging markets, making investors cautious about valuations.

Global Risk-Off Sentiment

Higher interest rates, uncertainty around global growth and currency movements encouraged investors to reduce exposure to emerging markets.

West Asia Developments and Crude Oil Prices Improve Sentiment

One of the major factors supporting the recent improvement in foreign investor sentiment has been easing geopolitical concerns.

The moderation in West Asia tensions and decline in crude oil prices reduced concerns around:

Inflationary pressure
Corporate cost increases
India’s current account position
Currency stability

Lower crude prices are particularly important for India as the country imports a significant portion of its crude oil requirements.

Stable oil prices improve the outlook for:

Inflation
Government finances
Corporate profitability
Consumer spending

Domestic Institutional Investors Provide Strong Market Support

While FIIs were aggressively selling Indian equities, domestic institutional investors (DIIs) played a crucial role in stabilising markets.

According to the MOFSL report, DIIs invested a record:

$162 billion between October 2024 and June 2026

Domestic investors helped absorb foreign selling pressure and provided strong support to Indian equities.

The growing role of domestic investors highlights a structural change in India’s stock market ownership pattern.

Domestic Ownership of Indian Equities Hits Record High

The increasing participation of domestic investors has significantly changed market dynamics.

According to the report:

FII ownership in the Nifty 500 declined to a record low of 17.1% in March 2026
Domestic institutional ownership increased to an all-time high of 20.9%

This indicates that Indian markets are becoming less dependent on foreign capital flows compared with previous years.

June FII Selling Continues, But Pace Moderates

Despite signs of recovery, FIIs remained net sellers in June.

Foreign investors sold approximately:

$5.2 billion worth of Indian equities during June 2026

However, the pace of selling was lower compared with previous months.

Sector-wise FII activity showed selective buying and selling trends.

Sectors That Witnessed Heavy FII Selling in June

Foreign investors reduced exposure mainly in:

Oil & Gas

Outflows: $1.4 billion

Automobiles

Outflows: $1.1 billion

Metals

Outflows: $1 billion

Technology

Outflows: $0.8 billion

These sectors faced pressure due to concerns around commodity prices, global demand and valuation factors.

Sectors Attracting Foreign Investor Interest

Despite overall selling, some sectors continued to receive foreign inflows.

Financial Services

Inflows: $0.4 billion

Services

Inflows: $0.3 billion

Consumer Durables

Inflows: $0.2 billion

Financial stocks have started attracting renewed interest as investors assess improving economic conditions and credit growth prospects.

Financial Sector Remains Biggest FII Outflow Area in 2026

During calendar year 2026, FIIs remained net sellers in Indian equities.

Total FII selling so far this year:

$29.2 billion

Five out of six months recorded net outflows, with February being the only month showing positive foreign flows.

Sector-wise:

Highest Outflows

Financial Services: $11.8 billion
Technology: $3.7 billion

Sectors Receiving Inflows

Capital Goods: $2.3 billion
Metals: $1.4 billion
Services: $0.6 billion

Capital Goods and Manufacturing Themes Continue to Attract FIIs

While foreign investors reduced exposure to several sectors, capital expenditure-linked themes remained attractive.

Capital Goods companies continued to benefit from:

Government infrastructure spending
Manufacturing expansion
Private sector investment cycle
India’s industrial growth story

The sector has consistently attracted foreign interest due to long-term growth opportunities.

FII Activity Improves After Market Volatility Peak

The MOFSL report highlighted a significant improvement in daily foreign investor activity.

During the peak of West Asia-related market uncertainty:

Average daily FII activity showed net selling of around $0.4 billion

Following easing tensions:

Activity improved to approximately $0.1 billion net buying

This indicates gradual improvement in foreign investor confidence.

Valuation Gap With Emerging Markets Narrows

Another factor supporting India’s attractiveness is the decline in valuation premium compared with other emerging markets.

Indian equities had previously traded at significantly higher valuations, creating concerns among global investors.

However, the recent market correction has brought valuations closer to historical averages.

This could encourage overseas investors to increase allocations towards Indian equities.

Outlook: Foreign Flows Could Improve Further

According to analysts, several factors could support a sustained recovery in FII flows:

1. Lower Crude Oil Prices

Stable energy prices could improve India’s macroeconomic outlook.

2. Improving Corporate Earnings

Better earnings growth could attract fresh foreign investment.

3. Attractive Valuations

Reduced valuation premiums could make Indian stocks more appealing.

4. Stable Domestic Economy

Strong domestic consumption and investment growth remain key positives.

What Investors Should Watch Ahead

Market participants will closely monitor:

FII buying trends
Crude oil movement
Global interest rates
Corporate earnings growth
Currency movement
Geopolitical developments

A sustained return of foreign investors could provide additional support to Indian equity markets.

Conclusion: FII Return Signals Potential Turning Point for Indian Markets

After a historic $60 billion outflow, early signs suggest foreign investors may be gradually returning to Indian equities.

While the recovery in FII flows is still at an early stage, improving global conditions, stronger domestic investor participation and attractive valuations provide a favourable backdrop.

For investors, the key will be whether this initial improvement develops into a sustained foreign investment trend over the coming months.