Foreign investors have turned buyers of Indian equities in July after months of heavy selling, raising hopes that one of the biggest pressures on Dalal Street may be easing. FIIs have bought more than $2 billion worth of Indian shares so far this month, after pulling out about $28 billion in the previous phase of selling. The return of foreign money has come at a time when crude oil prices have cooled from recent highs, the rupee has stabilised and global risk appetite has improved.
Analysts, however, are not calling it a clear trend yet. They say the July buying is encouraging, but it still looks like a tactical return rather than a full shift in foreign investor positioning.
Why FIIs are buying again
The biggest change has been in global risk sentiment. Foreign investors had been cutting exposure to India for months because of high valuations, rising US bond yields, a strong dollar, geopolitical risk and worries over crude oil. Some of those pressures have eased in July.
Paresh Bhagat, Chairman, Mangal Keshav Financial, said the recent inflows are encouraging, but should be seen as a tactical improvement. "A combination of easing geopolitical concerns, expectations of a less aggressive US Federal Reserve, improving global risk sentiment and relatively attractive valuations following the recent correction has prompted foreign investors to selectively return to emerging markets, including India," he said.
The correction in Indian equities also helped. After a period of underperformance and profit booking, valuations in some pockets became more reasonable. That gave FIIs a better entry point, especially in large-cap names where liquidity is high.
Also Read: Goldman Sachs pegs Nifty target at 26,500 by June 2027; lists 15 stocks from key themes
Crude oil has also played a key role. India is a large crude importer, and a fall in oil prices helps the rupee, inflation and the current account balance. When oil prices rise sharply, foreign investors often worry about India’s macro stability. When oil cools, those concerns reduce.
Balaji Rao Mudili, Research Analyst at Bonanza, said crude moving back closer to pre-war levels was one of the major reasons behind the return of foreign buying. He said the rupee’s recovery from its May lows also helped. "Currency stability is often one of the major triggers for FPIs to re-enter," he said.
India's growth story intact
Foreign investors are also looking beyond near-term market moves. India continues to offer a wider growth opportunity than many emerging markets, where performance is often driven by a few sectors.
Rajesh Kothari, CIO, AlfAccurate Advisors, said India offers diversified opportunities across banking, consumption, automobiles, healthcare, capital goods, manufacturing, retail and financial services. "This breadth of opportunities is difficult to find in many other markets and makes India an attractive long-term investment destination," he said.
The diversification comes a time when investors are questioning crowded trades in other markets. Taiwan and South Korea remain closely linked to semiconductors and technology exports. India offers exposure to domestic consumption, financial services, infrastructure, manufacturing and services.
Kothari also pointed to foreign direct investment as a support factor. Global companies continue to invest in India across manufacturing, technology and services. Strong FDI flows improve confidence in India’s long-term growth story and can support portfolio flows over time.
Have FIIs turned the corner?
Analysts are divided on whether the July buying marks the end of the selling cycle. The mood has improved, but most market participants want to see flows sustain for more than a few weeks.
Bhagat said it is too early to conclude that FIIs have turned decisively bullish on India. Foreign investors still look at US interest rates, bond yields, the dollar index and valuations across emerging markets before allocating money. India remains one of the more expensive large emerging markets, which means flows may remain selective.
"Investors should avoid interpreting one month of buying as the beginning of a sustained trend," he said.
Mudili also warned that July has recovered only a small part of the earlier outflows. He said foreign investors have still pulled out a large amount from Indian equities in 2026, and one or two weeks of buying after heavy selling should not be seen as a confirmed trend.
The biggest risk remains crude oil. The same geopolitical tensions that pushed FIIs out can return quickly. Any fresh escalation in West Asia or renewed threat to oil supply routes can lift crude prices, weaken the rupee and again make FIIs cautious.
What will decide the next leg of flows
The next few months will depend on four main factors: crude oil, the dollar, US rates and corporate earnings. If crude stays stable, the rupee remains steady and the US Federal Reserve moves closer to a softer rate stance, foreign investors may increase exposure to India. Lower US yields reduce the attraction of dollar assets and make emerging markets more appealing.
Earnings will be equally important. The Q1 season has started, and investors will closely track management commentary on demand, margins and capex. If earnings hold up, foreign investors may become more confident about India’s premium valuations.
Kothari believes the prolonged phase of outflows is largely behind India. “Although short-term flows will continue to be influenced by global factors such as US interest rates, the dollar and geopolitical developments, I would not be surprised to see strong FII inflows over the coming quarters,” he said.
"If domestic growth remains strong and oil prices stay low, the initial $1 billion is just the start. India previously lagged in AI investments, prompting foreign investors to favor markets like Taiwan and South Korea instead. Now, with valuations rising and the "fear of missing out" on AI hardware fading, investment is shifting back to India’s consumption and infrastructure development," said Vipul Bhowar, Executive Director and Head of Equities, Waterfield Advisors.
Domestic flows remain the stronger anchor for now. SIP inflows, mutual fund buying and retail participation have helped Indian markets absorb foreign selling over the past few months. This support has reduced India’s dependence on FIIs compared with previous cycles.
For now, the return of over $2 billion is a positive signal after a painful selling phase. It shows that India is back on the foreign investor screen. It does not yet prove that FIIs are fully back.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
