Foreign institutional investors (FIIs) are suddenly buying India after months of relentless selling, raising the biggest question on Dalal Street: has the great FII reversal finally begun? FIIs have bought a net Rs 39,404 crore in Indian equities over 13 trading sessions since Oct. 16, according to the latest data. The turnaround comes after a record-breaking sell-off that had pushed foreign ownership of Indian stocks to historic lows.

The buying momentum accelerated on Thursday. The Sensex jumped 2%, or more than 1,600 points, to cross 78,900, while the Nifty climbed above 24,400. The rally followed a 3% overnight surge in the Dow Jones Industrial Average after Democrats won both chambers of the US Congress in the midterm elections.

The reversal is being powered by a combination of improving earnings, falling crude oil prices, hopes of peace in the Middle East, a softer dollar and expectations of a possible cut in long-term capital gains tax for foreign investors.

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Why are FIIs coming back?

Global brokerage Nomura said India’s relative appeal among foreign investors could improve as corporate earnings deliver, valuations remain below post-pandemic averages and global headwinds ease.

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The brokerage said Indian equities have gained 6% in dollar terms since Oct. 8, outperforming most major markets. It expects strong earnings, lower global yields, support for the rupee and weakness in artificial-intelligence stocks to support foreign flows in the near term.

The shift is significant because FIIs sold about $5 billion in the fortnight ended Oct. 15, the heaviest fortnightly outflow in 12 fortnights. Their net selling since Sept. 15 had reached about $8.8 billion, according to Nomura. Selling intensity, however, had started to ease over the following 15 days.

Crude oil has become India’s biggest tailwind

Brent crude has fallen sharply, with prices down about 10% to around $94 a barrel. The decline reflects hopes that the US-Iran conflict could move towards a resolution. “The strongest positive for the market is the sharp 10% fall in Brent crude to around $94 level,” said Dr. V K Vijayakumar, chief investment strategist at Geojit Investments.

Lower oil prices could ease pressure on India’s inflation, import bill and current account. The impact is particularly important after high crude prices and geopolitical tensions contributed to the earlier wave of foreign selling.

Nomura said the bargaining positions of the US and Iran could reverse after the US midterm elections, with Iran becoming more willing to negotiate. It also said the Fed could pause rate hikes if hopes of peace lower oil prices or if credit concerns intensify.

Earnings are giving FIIs a reason to look again

The FII reversal is not being driven only by global market sentiment. India’s corporate earnings are also improving. Nomura said normalised profit after tax for 134 companies in its BSE 200-plus universe grew 34% year-on-year in the second quarter of fiscal 2027, beating consensus estimates by 18%. Excluding oil and gas, profit growth was 29%, still 5% ahead of expectations.

Power, coal, metals, infrastructure and pharmaceuticals reported better-than-expected earnings, while the demand environment remained resilient across segments.

“The decline in crude prices is happening when the Indian economy is showing great resilience and corporate earnings are showing significant improvement,” Vijayakumar said.

Valuations are no longer as demanding

Nomura said valuations across most sectors are below their post-pandemic averages. The Nifty is trading near the lower end of its post-pandemic forward price-to-earnings range of 17 to 22 times.

That gives FIIs a more attractive entry point after the market correction. Nomura said low starting expectations, strong earnings and weakness in AI-heavy global indices had helped India outperform markets such as Korea, Taiwan and the Nasdaq in dollar terms.

The brokerage said this momentum could take the Nifty past its March 2027 target of 24,000, based on 17 times fiscal 2028 earnings.

Hopes of an LTCG cut are improving sentiment

Expectations that long-term capital gains tax could be abolished in the coming Budget are also supporting the FII turnaround. Vijayakumar said the possibility of an LTCG tax change, along with stronger earnings and lower oil prices, had “completely changed the FII’s stance towards India.”

Nomura also listed a possible LTCG cut for foreign institutional investors as one of the factors supporting a revival in portfolio flows.

The initial FII buying has been accompanied by a sharp rebound in largecap stocks. Vijayakumar expects more short covering, particularly in banking and financial majors.

“There is more short covering to happen in large-caps and, therefore, expect further rebound in large-caps led by the banking/financial majors,” he said.

But the rally may not be one-way. Vijayakumar warned that domestic institutional investors could sell into strength, creating profit-booking pressure at higher levels.

The early evidence is encouraging, but it is too soon to declare a permanent FII return. Nomura said momentum remains vulnerable to elevated oil prices, global yields, geopolitical uncertainty and concerns around technology spending. It also said long-term worries around geopolitical and technological uncertainty continue to weigh on India’s growth outlook.

Vijayakumar warned that the initial market reaction to the US midterm results could eventually give way to renewed political conflict in Washington.

“Trump being what he is, is likely to turn Mr Veto rather than a lame-duck president,” he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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