Investors in the need to be thorough and avoid getting carried away by the shrieking headlines. There is a deep undercurrent in the Indian equity markets.
The good news is that even in these adverse circumstances, there are still opportunities in the market – making deep analysis and thorough scrutiny the need of the hour.
“While India as an economy has reasonably good prospects in the long term, it is not as secular a growth story in all circumstances. The cyclicality in this economy seems to have gone up,” says P. Krishnan, Managing Director & CIO, Equity Asset Management, Spark Asia Impact Managers, highlighting how foreign institutional investors (FIIs) now view India. He highlights that the FII selling in India has been persistent and was visible before the Iran war, noting that they (FIIs) have been sellers in the cash market right from after Covid.
Poor earnings growth has been a major trigger for Indian stocks. FIIs feel that Indian bourses have high valuations relative to earnings growth, high valuations relative to other EMs and growth, which has become more cyclical in many ways than it is secular (while acknowledging that the baseline growth is higher than in other EMs, including China).
The current crisis in the Middle East is particularly negative for India as its dependency on imported energy stands exposed.
Also, it may be noted that the Indian rupee (INR), which was an underperformer even in the year before this crisis, has seen a further slide.
According to a Research Report from CNI InfoXchange, India’s equity narrative through 2028 will be a classic domestic strength vs global friction battle. While holds at 6.5-7.2% on capex cycle momentum, the Nifty’s 12-15% CAGR hinges on navigating , Fed-BoJ divergence, and monsoon roulette. Forward valuations (Nifty P/E ~19.5x) already discount much good news, making headline risk the dominant alpha driver over fundamentals.
Therefore, experts feel little probability of a notable reversal in the direction of FII flows in the next 1-2 quarters. However, the quantum of selling could ease based on how things progress from here.
What could trigger FII trend reversal?
A reversal (of FII views towards Indian equities) may be possible if we pass on the cost of the war, send signals that capital will be respected and defended with structural measures, rather than tax sops or forex reserves, and if valuations correct, believe experts
“The problem with giving a positive call for FII flows is that there has been an ‘entitlement bias’ in favour of flows – the argument is ‘Too much selling has happened’ and ‘India is a must-have’ – These are completely wrong premises,” says Krishnan. India is not entitled to flows. If India displays willingness to remain attractive (not by taxation – which we believe cannot be a sop for attracting capital when in trouble), then we can see some positive movement in due course.
“FIIs have no reason to be impressed with the buying support from domestic retail investors,” says Krishnan. They have seen this script play out elsewhere and where that was not supported by good fundamentals but only by a colourful narrative, things have not ended well for that market. Examples include Japan, Taiwan, South-East Asia, Latam and China.
Therefore, just as they were long-term optimists on India for over two decades, they will be patient sellers. The concept of patient sellers is not yet well-understood by domestic capital. It is underpinned by a willingness to wait for meaningful mean reversion (and not to convenient term means) and investment discipline, which is not swayed by perpetual hope trades.
It is also guided by the principle that the best investments are made when a choice is exercised in inclusion and exclusion.
Where to invest amid FII selling?
Take heart, though. Even if the FIIs are downbeat on , there are still pickings to be had.
“Domestic cyclicals continue to outperform while global-facing sectors remain under pressure due to crude oil volatility, rupee weakness and FII outflows,” says Aakash Shah, Technical Analyst, Technical Research, at Choice Broking. Recent market action suggests that investors are increasingly focused on earnings visibility, liquidity trends and geopolitical risks rather than broad valuation expansion.
Shah notes that Banking & Financials continue to stand out as one of the market’s strongest leadership sectors. Both PSU and private banks are witnessing sustained institutional accumulation, supported by resilient liquidity conditions and stable earnings visibility. Capital Goods, Power, Infrastructure, EMS, Defence and Manufacturing themes continue to show strong bullish momentum.
Conversely, Shah notes that IT has underperformed the broader indices. Additionally, export-driven sectors like chemicals, metals and global cyclicals also remain under pressure due to crude oil volatility, currency instability and slowing global demand.
Rising Brent crude prices and geopolitical tensions are further increasing inflation worries, putting additional pressure on oil-sensitive and rate-sensitive sectors across emerging markets like India.
“Even while selling large-caps, they have been buying in SMIDs (small and mid-cap stocks) where growth and earnings prospects are good,” says Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Investments. This means earnings are the primary priority for the FIIs.
“Export-related stocks with moats other than INR will benefit from the fall of INR,” says Krishnan. He is also bullish on healthcare, but cautions on valuations in some stocks in this sector.
Krishnan is cautious on consumption due to inflation and raw material pressure.
Key takeaway for retail investors in strained circumstances
“The current market environment favours stock-specific and sector-rotation strategies rather than aggressive index-based bets,” says Shah. Buy-on-dips opportunities remain stronger in domestic themes like , , and manufacturing, while disciplined risk management and strict stop losses are crucial amid high volatility.
“The key technical risks for Indian equities till September 2026 remain crude oil volatility, rupee weakness, global carry-trade unwinding and geopolitical uncertainty,” says Shah. Until crude stabilises and geopolitical risks ease, Indian equities are likely to remain tactical, rotational and sector-driven rather than entering a sustained, broad-based trending phase.
Meanwhile, Vijaykumar adds that investors should remain invested and continue to invest systematically in high quality fairy-valued stocks. “This will benefit them when the market springs a surprise at the most unexpected time,” says Vijayakumar.
“Do not get carried away by the opinions of so-called experts. In most situations, they are conflicted due to their positions (and it is not their fault) and carry an optimistic bias,” advises Krishnan, who notes that you do not have to be optimistic on equities in all circumstances.
(Manik Kumar Malakar is a freelance author. He writes on personal finance, bonds and equity markets.)
Disclaimer: This story is for educational purposes only. 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.