Foreign Portfolio Investors (FPIs) have sold Indian equities amounting to ₹2.51 lakh crores from the last Diwali in October 2024 to this year’s Diwali in October 2025, based on data. Some early indicators of renewed buying this October bring a sense of optimism and raise the question of whether the new Samvat 2082 might represent a turning point for foreign investments.
Up to October 17, 2025 the rate of foreign institutional investor (FII) selling has significantly decreased to only ₹4,114 crores. This shift in FII strategy is largely attributed to the narrowing valuation gap between India and other global markets. India’s relative underperformance over the past year has created opportunities for improved performance in the future, believes experts.
In discussing the sectors that may attract FII investment once again, it’s noted by Elara Securities that mid-cap FII ownership has varied between 13.5% and 16.3% over the last five years, with recent data suggesting initial signs of stability and a possible bottoming out. This is in contrast to the continued decline in ownership of large-cap stocks. The brokerage views mid-caps as increasingly favourable for FII reallocation, bolstered by enhanced earnings visibility and a more attractive valuation framework.
“FII ownership in Indian equities remains below historical norms, with Nifty 50 holdings down from ~28% in Dec 2020 to ~25% in June 2025, and Nifty 500 holdings dropping from ~23% to ~20% over the same period. However, mid-cap shareholding trends show relative resilience,” said Elara Securities.
The brokerage supports a pro-cyclical approach, increasing investments in mid-cap stocks while remaining positive on large-cap stocks. Small-cap stocks may experience a short-term rally driven by market fluctuations, but high valuations and inconsistent earnings visibility suggest a more cautious strategy over a 12-24 month period.
Key factors that favours gradual FII reallocation
Elara Securities is optimistic about India’s favorable fiscal and monetary environment, robust GDP growth forecast exceeding 7%, and an anticipated Nifty EPS growth of 13-15% (in INR) for FY25E-27E, coupled with manageable inflation, creating a solid foundation for ongoing domestic equity investments. As valuation premiums decrease and earnings revisions stabilize, the current landscape now supports a gradual reallocation by foreign institutional investors (FIIs) alongside ongoing domestic leadership.
Despite this positive outlook, India is significantly underweight in emerging market (EM) portfolios, with FII allocations falling 3 percentage points below the EM funds target weight of 17.5% — marking the most substantial underweight since 2009. This discrepancy has continued even while India’s macroeconomic indicators remain the strongest in the EM space.
India continues to have higher RoE than China and EMs
Elara Capital stated that India’s representation in emerging market (EM) indices has gradually increased to approximately 18% from 6% in January 2009 (down from a peak of 22% in August 2024), yet the actual investment by EM investors remains significantly lower than this figure. This discrepancy positions India as one of the most under-invested markets historically, with current allocations falling short of its representation in the MSCI EM index.
Despite this gap, India still trades at a premium compared to EMs; however, this premium has substantially decreased over the last two years. Currently, MSCI India has a trailing twelve months price-to-earnings (P/E) ratio of about 25.1x, while MSCI EM sits at around 16.4x and China at roughly 15.6x, indicating premiums of 53% and 61%, respectively.
Significantly, India’s return on equity () remains a crucial factor, with current ROEs around 15%, roughly 50% higher than China’s 10%. With the extremes now in the past, the future direction of the market will depend on the path of earnings adjustments.
The near-term Outlook
Akhil Puri, Partner, Financial Advisory, Forvis Mazars India of highlighted that while risks remain from geopolitical tensions, protectionism, and commodity volatility, India’s macro fundamentals look far stronger than most emerging peers. With inflation under control, rural demand improving, and government-led capex momentum intact, the domestic economy is well-poised for a steady FY’26.
“Once global rate pressures ease, FPIs could return more decisively. But even in their absence, India’s market strength now rests on domestic pillars i.e. resilient consumption, stable policy, and institutional depth. As Samvat begins, the balance of power in Indian markets appears to have shifted … from foreign capital to homegrown confidence. And that may be India’s biggest advantage in the year ahead,” said Puri.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.