For months, foreign investors seemed to have little appetite for Indian equities. Now, the mood is beginning to change. Foreign portfolio investors (FPIs) returned to Indian stocks in August, marking their second consecutive month of buying after a prolonged period of heavy selling.
FPIs invested around $3.1 billion in Indian equities in August, their biggest monthly inflow in nearly two years. But the return of foreign money does not necessarily mean investors have suddenly turned fully bullish on India. A mix of stronger earnings, robust economic growth and a better liquidity and currency backdrop appears to be behind the shift.
One of the biggest changes is the improvement in India’s economic and corporate earnings picture.
India’s , beating expectations. At the same time, Nifty 50 companies reported around 18% growth in profits during the June quarter, the strongest pace in 10 quarters.
This has helped ease one of the key concerns that had weighed on Indian equities — whether high valuations were being supported by strong enough earnings.
“The return looks like a combination of three factors: improving earnings, stronger domestic growth, and a more supportive liquidity/currency backdrop,” says Prashant Shah, Co-founder and CEO, Definedge Securities.
He adds that India had become “easier to own again” after a period when foreign investors were directing more money towards other Asian markets.
The shift is not necessarily because Indian stocks have suddenly become cheap.
India continues to trade at a premium to many other emerging markets because of its growth and domestic consumption story. However, Indian equities had underperformed some North Asian markets, including Japan, South Korea and Taiwan, which benefited from the artificial intelligence and semiconductor boom.
That has created room for foreign investors to rotate some money back into India.
Shah said the relative-attractiveness argument is stronger than the absolute-valuation argument.
“Foreign investors do not need to believe India is a bargain; they only need to believe the risk-reward has improved versus the alternatives,” he says.
The return of foreign capital is not entirely an India-specific story. Global interest rates, US bond yields, the dollar and crude oil prices continue to influence how investors allocate money to emerging markets.
A rise in US Treasury yields can make dollar assets more attractive and raise the return investors expect from emerging markets.
The recent global backdrop has not been particularly easy. The US 10-year yield was around 4.78% on September 1, while oil prices moved above $91 a barrel amid renewed tensions in the Middle East, says Shah.
Yet India has had some positives to offset these pressures, including strong GDP growth, improving corporate profits and a record foreign exchange reserve position.
“Global liquidity matters, but the renewed interest is not simply a Fed-driven trade; investors are also responding to a better domestic growth-and-earnings equation,” Shah says.
The return of foreign money has not been spread evenly across the market. Financial stocks have emerged as one of the clearer areas of interest.
In the second half of June, FPIs bought around Rs 14,634 crore worth of banking stocks, marking the strongest fortnightly inflow into the sector in 14 months.
Raju Ranjan, Chief Research and Product Officer at Definedge Securities, says financials are among the clearest beneficiaries of the recent shift.
“Financials are among the clearest beneficiaries, supported by steadier earnings expectations, credit growth, and more reasonable valuations after the earlier correction,” Ranjan says.
He adds that foreign investors are likely to favour businesses with visible domestic demand and stronger earnings visibility rather than making a broad-based bet on the market.
Selected autos, healthcare, consumer-facing companies and parts of the IT sector could also benefit from this preference, he says.
For now, it may be too early to call the recent inflows the beginning of a sustained foreign-investment cycle.
August was the second consecutive month of net buying, but FPIs have still recorded around $24.6 billion of net equity outflows in 2026 so far.
Ranjan described the current phase as an early-stage reversal rather than a confirmed multi-year FPI cycle.
“For the turnaround to become durable, investors need to see three things persist: earnings upgrades, macro stability, and a global rate environment that does not become materially more restrictive,” he says.
That means foreign investors could still change course if global conditions worsen or India’s earnings momentum loses steam.
There are several risks that could interrupt the return of foreign capital. Higher US yields, a stronger dollar, expensive valuations, higher oil prices and geopolitical tensions remain key concerns.
A sustained rise in crude prices could be particularly uncomfortable for India, given its dependence on imported oil. At the same time, a stronger dollar and a weaker rupee can reduce returns for overseas investors.
“If profit growth disappoints or earnings upgrades reverse, the market’s premium multiple becomes harder to defend,” Ranjan says.
The currency will also remain important. A stable or stronger rupee could support foreign flows, while renewed weakness could make Indian assets less attractive.
A sustained return of foreign money would generally be positive for Indian equities. Strong FPI inflows can improve market liquidity and provide additional dollar supply, which can also support the rupee.
However, domestic investors should not treat foreign buying as a guarantee that markets will continue to rise.
For one, the market can become more sensitive to global risk if foreign ownership rises again. At the same time, strong domestic flows provide an important counterweight to FPI movements.
The current picture, therefore, is less about foreign investors suddenly turning bullish and more about India becoming attractive enough again to bring some of their money back.
As Shah put it, foreign investors are becoming less bearish on India rather than suddenly turning unconditionally bullish. The August inflows are encouraging, but the large year-to-date outflow shows that the recovery still has a long way to go.