After a year marked by heavy outflows, Foreign institutional investors (FIIs) appear to have turned positive in 2025.
“If we look at the rolling six-month average FII flows data over the last 10 years, flows seem to be at an inflexion point, with signs of mean reversion as inflows recover from historically low levels,” said Akash Hariani, Joint MD, Motilal Oswal Private Wealth.
Explaining the outflows last year, Hariani noted that between October 2024 and February 2025, FIIs pulled out funds largely due to China’s stimulus announcement in late September 2024. “This was further accelerated by a rise in the dollar index and US bond yields. Earnings moderation and slowing growth in India made valuations less compelling, driving flows toward more attractive opportunities like the US. Uncertainty around global tariffs also kept foreign investors cautious,” he said.
However, a recent BNP Paribas India Strategy report indicated that FII ownership in Indian equities has remained stable since February.
Rebound in sentiment
The rebound in FII sentiment is being attributed to a weakening dollar index. Trideep Bhattacharya, CIO, Edelweiss Mutual Fund, said India could emerge as a preferred FII destination over the next three to five years. “In a world shifting towards protectionism, economies driven by domestic demand, like India, are likely to outperform export-heavy markets such as the US,” he said.
Bhattacharya also pointed out that five years ago, India was heavily FII-dependent, and their flows often dictated market volatility. “Now, thanks to steady SIPs, contributions from the NPS, pension inflows, and passive investments, domestic institutional inflows are matching or even exceeding FII investments,” he said.
BNP Paribas noted that monthly SIP flows rose 2.7% in April after three months of decline. “SIP contributions are currently driving all equity inflows, as lump sum investments have now declined for four straight months,” the report said.
Hariani added that strong DII flows had helped absorb last year’s FII selling. “Mutual funds sitting on cash used the dip to accumulate quality stocks at attractive valuations. The selling pressure from FIIs was met largely by DIIs. Now, as concerns ease and valuations offer a margin of safety, FII flows are turning positive, while DIIs appear to be taking a breather,” he said.
Near-term outlook
Looking ahead, near-term market movement could be limited. “The current result season hasn’t thrown up any big surprises, and with the Nifty trading at 20x FY27 earnings, there may not be much room on either side,” said Jaykrishna Gandhi, Head of Business Development, Institutional Equities, Emkay Global.
He added that the transmission of RBI’s earlier rate actions could begin showing up in the coming quarter. “A favourable monsoon, low base effect from last year, and government spending, shaped by the upcoming RBI dividend decision, could keep the momentum going.”
However, some headwinds remain. “The US 10-year yield staying above 4.5% is a concern. Several private equity exits lined up in the next few months could also absorb domestic liquidity. If China cuts rates and strikes a trade settlement with the US in the next 90 days, we could see some EM flows shift to China. That, along with a stronger dollar and crude, could pressure Indian flows and earnings. Covid-related risks in Asia also bear watching,” Gandhi warned.
Published on May 23, 2025
