Foreign Investors Return to Indian Stocks After Four Months, but Inflows Remain Modest

After a four-month hiatus, Foreign Portfolio Investors (FPIs) have turned net buyers of Indian equities in the first 10 days of July, purchasing shares worth $1.6 billion. However, analysts remain cautious about the sustainability of these inflows.

The outflow of $28 billion by FPIs from domestic equity markets began in late February, triggered by the West Asia war. Sentiment improved after the US-Iran peace deal on June 14, leading to net inflows of $1.1 billion in the second half of June, compared to outflows of $6.7 billion in the first half.

Despite the recent buying, experts say there is little evidence that foreign investors' view of India has fundamentally changed. The inflows coincide with a pullback in AI-driven markets like South Korea, raising concerns about overstretched tech valuations.

Pravin Bokade, head of research at IDBI Capital Markets, noted that FPIs may be entering India because downside risks are limited. 'Thus, they are entering markets like India, where the downside is very limited at this point, so they can at least protect their money,' he said.

Motilal Oswal Financial Services added that as the initial AI capex cycle matures, investors may look for opportunities in secondary AI markets, making India attractive due to improving macro fundamentals. The brokerage noted that India's valuation premium over emerging markets 'has compressed to a historic low of 18% in June, significantly below its long-term average of 73% and CY22 peak of 147%'. This, according to them, leaves fewer reasons for FPIs to remain net sellers for long.

Government and Reserve Bank of India measures on June 5 to boost debt inflows may have indirectly supported equity markets by improving the Balance of Payments, increasing foreign participation, and stabilizing the rupee. Vishad Turakhia, MD and CEO of Equirus Securities, highlighted that currency stability is crucial for overseas equity investors, as continued depreciation can erode returns in dollar terms.

In June, foreign inflows into the debt market surged to $5.8 billion from $291 million in May, and concerns about the rupee hitting 100 per dollar have dissipated.

However, the recovery remains fragile. Markets slumped over 2% on Wednesday after US President Donald Trump announced an end to the ceasefire with Iran. Dhananjay Sinha, CEO and co-head of institutional equities at Systematix Group, said the inflows have been too modest to draw positive conclusions. He expressed skepticism about earnings growth, noting that Nifty 50 companies' average net profit grew in mid-to-high single digits in FY26, well below the 15-20% growth seen post-Covid.

Kotak Institutional Equities was even more cautious, stating that using AI and geopolitics to explain India's weak performance 'seem superficial'. They warned that 'sections of the market have been too complacent on the quality of the business models of Indian companies and disruption risks to their business models, too generous in valuing the market for the past few years, and too optimistic on earnings.'