India Strategy : The In and Out of FII flows: Sentiment finally turns around by Motilal Oswal Financial services Ltd
* Amid heightened global volatility, the Indian market has been trading in a tight range for the past 22 months. Although India underperformed global peers in CY26YTD, equities have rebounded from the Mar'26-May'26 lows, clocking gains for the second consecutive month. While the Mid- and Small-cap indices have scaled fresh all-time highs, the Nifty-50 remains ~5% below its Sep'24 peak, largely due to FIIs' sustained underweight position in Indian index heavyweights.
* Since the Sep'24 market peak, FIIs have remained persistent net sellers, with cumulative outflows of USD57b, including ~USD27b in CY26YTD. Encouragingly, after four months of sharp selling (Mar'26-Jun'26), FIIs turned net buyers in Jul'26, investing USD2.5b, the highest monthly inflow in the past 13 months.
* While improving macro fundamentals, robust corporate earnings growth, moderating valuations, and easing energy price volatility strengthen India's investment case, the sustainability of FII inflows will remain a key monitorable amid lingering geopolitical uncertainties, a moderation in the AI-led global equity rally, and persistent volatility in global bond yields.
* In this report, we analyze FII flows across various sectors in the Indian markets in Jul’26 and CY26YTD and evaluate their broader stance across sectors for the year.
FII flows reverse direction in Jul’26
* Notably, FIIs turned positive on Indian equities after four consecutive months of sharp exodus, investing USD2.5b in Jul’26, while DII flows remain positive at USD3.7b during the month.
* In Jul’26, 12 of the 20 sectors experienced inflows. FIIs turned buyers in 12 of the 20 sectors in Jul’26 (vs. sellers in 12 in Jun’26), signifying a reversal in sentiment.
* FIIs remained most bullish on Consumer Services (+USD 1.1b) and Healthcare (+USD0.8b), accounting for ~90% of total inflows in Jul’26. In contrast, they were most bearish on Capital Goods (-USD0.7b), Telecom (-USD 0.6b), and Automobile (-USD0.5b) during the month.
* Notably, FIIs turned positive on Healthcare (+USD0.8b), Technology (+USD0.3b), and Real Estate (+USD0.2b) after several months of weak or volatile flows. Meanwhile, Metals (+USD0.5b) saw a sharp rebound in buying after recording ~USD1b of outflows in Jun'26.
* In contrast, Capital Goods (-USD0.7b) recorded its second consecutive month of FII outflows following a strong five-month buying streak. Meanwhile, O&G and Telecom witnessed their fifth and sixth consecutive months of outflows, respectively. FMCG recorded its 12th consecutive month of FII outflows, although selling pressure eased in Jul'26 (refer to exhibits from 16 onwards).
Sustained FII inflows likely to reinforce the market uptrend
* Surprisingly, the sharp FII exodus over the past two years has reduced cumulative net FII flows into the secondary market over the past decade (Aug'16–Jul'26) to virtually zero. However, foreign investors have remained active in the primary market, deploying a similar quantum of capital through IPOs and private placements. This underscores a structural shift in FII capital allocation, driven by a buoyant primary market and the increasing dominance of DII and retail investors in the secondary market since 2021.
* However, the combination of easing geopolitical risks, moderating energy prices, improving corporate earnings, and a meaningful correction in valuations from CY24 peaks has materially enhanced the market's risk-reward profile. With the FII flows turning positive after four months of record selling, we expect the sentiment to remain positive for Indian equities
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