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After 4 months, FIIs start returning to Indian stocks — but not much has changed

Analysts think the use of AI and geopolitics to argue away India’s weak performance over the last two years appear to be 'superficial'.

The West Asia war in late February sparked a $28-billion exit by FPIs from domestic equity markets over the next four months. Ganesh Shirsekar

Written by: Akash Mandal

5 min readMumbaiJul 11, 2026 06:15 AM IST First published on: Jul 11, 2026 at 06:15 AM IST

After four months, Foreign Portfolio Investors (FPIs) — at least in the first 10 days of July — have been net buyers of Indian stocks, having purchased shares worth $1.6 billion. However, it may not amount to much.

The West Asia war in late February sparked a $28-billion exit by FPIs from the domestic equity markets over the next four months. The US-Iran peace deal, announced on June 14, turned sentiment around, with the second half of last month seeing net inflows of $1.1 billion after outflows of $6.7 billion in the first half.

But there is little to suggest that the return of FPIs — which has coincided with a sharp pullback in AI-led markets such as South Korea on worries about the tech rally being overstretched — has changed how foreign investors view India as a market.

Limited downsides, AI alternative

Some experts think that while foreign flows into Indian equities may remain iffy going forward, a deep sell-off may not be seen again as FPIs may see India as an opportunity after valuations in AI-driven markets have gone through the roof.

“Thus, they are entering markets like India, where the downside is very limited at this point, so they can at least protect their money,” said Pravin Bokade, head of research at IDBI Capital Markets.

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Further, as the initial AI capex cycle matures, investors will also look for opportunities in secondary AI markets. In this regard, India becomes more attractive thanks to improving macro fundamentals, Motilal Oswal Financial Services said in a report earlier this month.

According to Motilal Oswal analysts, 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.

The measures taken by the government and the Reserve Bank of India on June 5 to boost inflows into debt may have also had an indirect effect on equity markers by having a positive impact on keenly-eyed metrics such as Balance of Payments, deeper foreign participation, and a more stable rupee. Vishad Turakhia, MD and CEO of Equirus Securities, pointed out that currency stability is a key consideration for overseas equity investors as continued depreciation can “significantly erode” returns in dollar terms.

In June, foreign inflows into the debt market jumped to $5.8 billion from $291 million in May, with talk of the rupee hitting 100-per-dollar in the coming months having vanished entirely.

AI, geopolitics ‘superficial’ reasons

The fragile nature of Indian markets’ recovery was on display on Wednesday when they slumped over 2% after US President Donald Trump said he was ending the ceasefire with Iran.

Even so, the inflows have been far too modest so far, making it difficult to extrapolate any positives, said Dhananjay Sinha, Systematix Group’s CEO and co-head of institutional equities. The Indian market, Sinha said, remains expensive and no earnings growth to match it.

“Do we have a scenario where earnings will grow from here on? My answer is no,” he added.

The average net profit of Nifty 50 companies grew in mid-to-high single digits in FY26, much higher than the 0.8% growth a year ago. However, it was well below the 15-20% growth seen immediately post-Covid.

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Others are less optimistic. According to Kotak Institutional Equities, using AI and geopolitics to argue away India’s weak performance over the last two years “seem superficial”.

“We believe 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,” Kotak analysts led by Sanjeev Prasad said in a note on July 1.

“In hindsight, both earnings and valuations (multiples) have turned out to be too optimistic in the context of large earnings downgrades over 2HFY25-1HFY26 and ‘weakening’ business models of companies; the destruction in the market caps of the IT services companies in the past few months is a case in point,” they added.

Markets rebounded by over 1% on Friday. In the larger scheme of things, though, this may not mean much.