Foreign institutional investor (FII) flows into India may be closer to a reversal than the market currently believes, according to DSP Mutual Fund, which said the present combination of weak macro sentiment, stretched external pressures and more reasonable valuations may actually be creating a contrarian opportunity for global investors.
“A shaky macro backdrop. That is precisely why this may be a strong contra signal,” said the brokerage. It further highlighted that historically, the biggest foreign inflows into India have come when valuations were cheap or at least reasonable. Not when optimism was highest.
The brokerage’s view comes at a time when foreign selling has remained intense. In March, foreign investors pulled out ₹1.14 lakh crore (about $12.3 billion) from domestic equities, making it the worst monthly outflow, amid rising tensions in West Asia, a weakening rupee and fears over the impact of elevated crude oil prices on India’s growth. In April so far, foreign investors have already withdrawn more than ₹29,000 crore, taking the total outflow in FY26 to ₹1.8 lakh crore, according to NSDL data.
FIIs also extended their selling streak on April 6, offloading equities worth ₹8,167 crore, even as domestic institutional investors remained supportive.
DSP, however, said foreign flows should not be looked at in isolation, arguing that overseas investors often follow market momentum rather than create it.
“Equity prices do not move because FIIs buy. Like most investors, FIIs chase price. They usually do not create trends,” DSP said.
The brokerage noted that India’s capital account has slipped into deficit, weighed down by weak foreign direct investment inflows, foreign portfolio outflows and large outward investments by domestic investors. Easier exits through IPOs, FPOs and OFS, along with stretched valuations, have also added to the pressure.
Rupee weakness and crude shock keep pressure on markets
Market sentiment has remained cautious after crude oil prices climbed above $110 per barrel, with tensions in the Middle East escalating after US President Donald Trump renewed threats against Iran over the Strait of Hormuz. The surge in crude has amplified concerns around inflation and India’s import bill, hurting overall risk appetite. Nifty 50 has shed almost 10% since the beginning of the war.
At the same time, the Indian rupee breached the 95-per-dollar mark for the first time, touching an all-time low of 95.12 against the US dollar despite recent measures by the Reserve Bank of India (RBI) to tighten banks’ forex exposure norms. The rupee has now depreciated more than 4.4% since the start of the US-Israel-Iran conflict, raising concerns around India’s external balances, widening current account deficit (CAD) risks and imported inflation.
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, said foreign portfolio investor (FPI) selling remained a key near-term overhang.
“FPI selling is largely short-term driven by weakness in the rupee and high US bond yields. This has created opportunities in high-quality financial stocks for long-term investors,” he said.
A separate report by YES Bank said India’s 10-year government bond yield is likely to remain elevated in the 6.75%-7.25% range in the first half of FY27, reflecting fiscal pressures, high global yields and continued weakness in the rupee.
DSP sees a contrarian opportunity emerging
DSP Mutual Fund said the current weak macro environment may itself be turning into a positive setup for foreign investors, as several of the factors that had kept them away from India now appear closer to peaking. The fund house said valuations in parts of the market have become more reasonable, particularly in select large, high-quality and liquid stocks, while the rupee’s sharp weakness has also improved India’s relative attractiveness.
“More importantly, the Indian Rupee is near one of its weakest REER levels in many years,” DSP noted.
The fund house further added that foreign inflows have historically returned when valuations were more reasonable rather than when market optimism was at its highest. DSP also said that many of India’s current macro stresses now look closer to being priced in, raising the possibility that the current phase of discomfort could eventually turn into a more favourable entry point for global capital.
“Historically, the biggest foreign inflows into India have come when valuations were cheap or at least reasonable. Not when optimism was highest,” it pointed out.
DSP believes that if there is a period after the Covid crash when both FPI and FDI flows can begin to improve again, it may be around the current zone.
For now, FIIs remain cautious. But according to DSP, the very factors driving foreign investors away today — weak currency, poor sentiment and macro discomfort — may ultimately lay the foundation for their return.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
